The release of the draft standards on diversity performance for regulated financial institutions has caused a number of interested organizations to assess how this policy would impact African-American communities. Those neighborhoods were damaged to the tune of $400 billion by the sub-prime mortgage crisis which led to Dodd-Frank and have failed to participate in the recovery.
Our major finding is that the standards do not use econometric measurements to evaluate performance on business lending. The late Dr. Leon Sullivan pointedly followed Opportunities with Industrialization in the 1960s. Industrialization has been the predominate need for African-American communities in the 50 years since, but the financial community has not met the credit demand.
Year of Jubilee: State of Black Business, 10th edition, found that SBA lending to African-American businesses fell more than three-quarters in every region of the country from 2008 to 2011, leading to a special panel to investigate.
Based on the Federal Reserve’s Survey of Small Business Lending, the aggregate demand for credit among the two million African-American businesses is $30 billion per year. Not only is that not being met, but the alternative of residential equity borrowing has dried up.
That demand can be broken down to the state and local level by applying the Fed’s average small business credit demand to the number of such enterprises in a given jurisdiction.
How institutions meet that demand should be one of the primary ways that regulators evaluate their performance. Such a standard would dramatically improve job creation and business formation, currently half the rate for whites in most of the country.
For those who might protest this initiative, the suggested national target amounts to $3,333.33 per day for each of the 30,000 regulated institutions, less than $1 million in business lending for each over the course of a year. A competent finance CEO should be able to make $5 million in loans to black businesses over a five year period or invest in someone who will.
We believe that the goal will be best achieved by incentivizing most institutions to partner with or invest in the institutions with the best track record for lending and investing in these communities. Member organizations of the National Association of Investment Companies, banks among the National Bankers Association and community development financial institutions have not received capital equivalent to the scope of the demand.
Regulators, 40 years after the Community Reinvestment Act, must move beyond ritualized “outreach” through award dinners and photo opportunities– just before regulatory filings– to making lending to black businesses a monetary target with daily monitoring. The goal represents $100 million in lending per day.
With much business lending moving into the realm of merchant banking, regulators must also assess how institutions manage capital. The impact of private equity and venture capital investments on domestic job creation in areas of labor surplus should be measured.
In some urban areas, disparate capital flows to trendy industries create dislocation pressures on communities which have been starved for investment in industrial jobs. Certain groups have unlimited access to capital. On any given day, the business press reports at least one non-diverse company which receives more than $100 million in venture investments, often several.
Silicon Ceiling 13: Equal Opportunity and High Technology notes that African-American innovators, among the 31,000 black technology companies, find those flows are not accessible to them, despite patents and trademarks and multiple degrees among key leadership.
In the same way that federal procurement is measured to second tier suppliers, financial institutions should report the extent to which managers which they invest in achieve fair business lending and investment.
As sizable financial enterprises, regulated institutions can make a huge difference with their procurement practices. Here again, econometric techniques have given way to mere window dressing. With African-American businesses seven percent of all such entities and blacks more than eleven percent of the population, marketing expenditures and philanthropic budgets should be measured within two standard deviations of those targets.
Using these objectives, more than two million jobs can be created in the communities which need them the most over the next five years.
John William Templeton, San Francisco
Timothy Bates, Ph.D. Asheville, N.C.
Anthony Robinson, Esq. Washington, D.C.
William Robinson, Detroit
Matthew Thomas, San Francisco