Although macroeconomic data made it clear from COVID’s start that the pandemic would be very, very painful, riots across the country expressed visceral rage not only about George Floyd’s murder, but also the unequal distribution of economic pain to people of color. Inequity along with inequality is nothing new for African-Americans – as our EconomicEquality blog post earlier this week showed, African-Americans are not only now frozen out of American prosperity, but now is even worse than before the civil-rights movement of the 1960s raised up so much hope. During the riots, banks in the District of Columbia were defaced with “eat the rich” signs, showing that at least some of the rioters had specific targets for poison-pen political messages. Better voices are again dominating the social-justice debate, but it’s still clear that an institutional response to banking-service inequality is needed now more than ever. A powerful one still won’t reverse all the causes of economic inequality and inequity – how could it given their historical depth and breadth? — but Equality Banks are both relatively easy to build and immediately visible. As a result, they would make both a substantive and political difference, each of which is urgently needed.
The basic outline of the Equality-Bank charter is outlined in my 2018 op-ed. In short, Equality Banks would be consortia of willing banking companies using the longstanding “bankers’ bank” charter and the regulatory latitude it affords to rewrite the profit equation to serve low- and moderate-income (LMI) households. The FFIEC today put out a general statement supporting financial inclusion. They can and should back it up by encouraging and enabling Equality-Bank charters. Although bankers’ banks cannot deal directly with consumers, they can provide operational, infrastructure, and securitization capacity that changes the economics of LMI banking, especially for smaller banking companies. Consortia of larger banks and/or those enabled by trade associations would be even more powerful, unifying and harmonizing inclusive and equitable finance in monoline institutions that, separate and apart from individual banks, can be trusted with considerably more regulatory freedom.
Another option is special-purpose charters akin to those authorized by the OCC for fintech companies. Like bankers’ banks, these special-purpose charters are not FDIC-insured. As a result, they are entitled to numerous regulatory benefits. The innovativeness the OCC intended to advance with its special-purpose fintech charters may well have social-welfare benefits, but many more could be advanced faster and with more certainty if a special-purpose bank earns its regulatory exemptions by innovating for those who need prudent, sustainable finance the most.
Once it is clear that LMI communities can be well served without undue risk and at reasonable return, more capital may follow this lead. If this happens – and I think it will – Equality Banks will have innovated in one of the most critical arenas ever: showing that it is possible to do both good and well by people now often ill-served by traditional finance and exposed to great risk outside the regulatory perimeter. The best possible outcome of equality banking would be dedicated institutions given the regulatory freedom to offer low-cost services to consumers many now think are high risk even though there is much data that minorities are under-served due to misconceptions, not unacceptable risk. Once this point is proved, really serious money could follow special-purpose charters, making LMI banking a truly competitive but still regulated business that protects consumers and profits providers.
At the time I suggested the Equality Bank, many bankers told me how enthusiastic they were about this bare-bones idea and how much they wanted to bring it into the marketplace. Bandwidth problems then intervened, but nothing now seems as urgent as doing the best one can to remedy the catastrophic economic cost of COVID in the midst of long-simmering economic inequality. Banks cannot remedy pernicious policing or endemic racism, but they can muster their economic resources to make a meaningful difference that might even make a bit of a profit.