This week I came across two articles that reminded me that investors and regulators can be two of the key drivers of a more sustainable and equitable financial system. On 11 October Gene Ludwig provided insightful commentary in the Financial Times on the role regulators can play to ensure that communities un(der)served by banking institutions the more attention they need. Ludwig focuses on how the Community Reinvestment Act (CRA) provides a framework for ensuring that banks serve the communities that serve the banks by providing them with deposits. Importantly Ludwig notes the need to go beyond the traditional CRA approach focusing on physical branches as banks move increasingly to on-line platforms to meet client needs. He also notes that this requirement needs to be extended beyond banks to cover a wide variety of other financial institutions. Finally he notes the important role played by Community Development Financial Institutions (CDFIs) in meeting the needs of local communities – especially as they deal with the impact of COVID-19.
The role of CDFIs can only be provided if they have sufficient capital – real equity capital. This need is real as CDFIs can not grow their impact without equity to support the risks they assume in their banking practices. George Surgeon and Laurie Spengler highlight this need in an article in ImpactAlpha published on 23 September. Most importantly they note that a focus on only providing deposits to CDFIs is not sufficient . Furthermore the amounts that would make a difference for the capital strength of CDFIs is minimal when compared to the financial resources of the large corporations that have stated their desire to take action to create a more just and equitable society.
Southern Bancorp provides a case study in what these two articles are preaching. In an article from July in Next City, Darrin Wiliams (CEO of Southern) provides a clear statement of what is needed to be an “anti-racist” bank. The steps are not so difficult but there are very few banks showing the leadership of Southern in this area. Time for more banks to learn how they can make a difference – and how regulators and investors can support and drive the needed change.
