Minority depository institutions (MDIs) make up a tiny fraction of all banks, and in Massachusetts that number is even smaller, but the barriers to entry for MDIs are the same that plague any fledgling financial institution in the recession’s wake.
According to a recent FDIC study, minority depository institutions comprise 174 of the 6,812 banks, or 2.6 percent, insured by the agency. Minority depository institutions also tend to be relatively small – the median MDI held $198 million in total assets at year-end 2013, and just 22 MDIs have assets greater than $1 billion.
The FDIC defines a minority depository institution as any federally insured depository institution where 51 percent or more of the voting stock is owned by minority individuals, which under the FDIC’s definition includes black, Asian, Hispanic or Native American people.
During the study period, between 2001 and 2013, the number of MDIs nationwide increased from 164 to 174 and their assets more than doubled, from $83 billion to $181 billion, the FDIC wrote in its report. But although the absolute number of MDIs increased over that timeframe, the FDIC also reported that “the size of the MDI sector peaked near the beginning of the recent financial crisis, and has trended downward since that time in both absolute and relative terms.”
MDIs are sometimes championed as a “beacon of hope” in impoverished communities. Like community banks, with which they share much in common, the reasoning goes that MDIs know their customers better than the behemoth banks and can reach vulnerable populations more effectively than big banks with out-of-state headquarters.
“The [low-to-moderate income] community has traditionally been underserved by conventional banks, notwithstanding the best efforts of conventional banks,” said John Carusone, president of the Hartford, Conn.-based Bank Analysis Center. “But because of a variety of cultural issues and regulatory concern about relaxing standards, the conventional approach has not been as efficacious as policymakers would hope.”
‘Hurdles To Entry’
While Massachusetts is home to a variety of racial and ethnic groups, particularly in cities like Worcester, Springfield, Lynn and Holyoke, the Bay State is home to just two financial institutions classified by the FDIC as minority depository institutions: OneUnited Bank, headquartered in Boston, and Leader Bank in Arlington. However, while the FDIC classifies Leader Bank as an MDI, the bank’s management does not consider itself as such.
In the years just before and after the recession, Pedro Arce attempted to launch Veritas Bank in Lawrence. That would not only have been an MDI, but also Lawrence’s only community bank – but the FDIC ultimately denied Arce’s bid to launch Veritas when he was unable to attract the necessary funding.
“The hurdles to entry are pretty high, just in general. To get investors interested in an institution that’s focused on a small segment of the population is a challenge,” Arce said.
“Since the recession, there has been more legislation passed making it very difficult not just for MDIs, but even for community banks,” he said. “It’s just not feasible anymore. Banking is about scale. If you can scale up, you’re in great shape; if you’re focused on a small segment of the population, you’re not going to scale up.”
Serving Gateway Cities
That’s one theory as to why minority depository institutions comprise such a small fraction of FDIC-insured banks.
Carusone said that notorious MDI failures – for instance, Shore Bank in Chicago – may have curbed regulators’ appetites for new minority-owned institutions.
He suggested that a limited-purpose charter requiring less capital and limiting the institution to smaller loans might be one solution.
Massachusetts’ neighbor to the south, Connecticut, actually has such a charter on its books. The Bank Analysis Center developed it pro bono in the mid-1990s as a community bank charter, and Carusone thinks the model has applications on a national scale – but to date, no investor group has ever applied for that charter in the Nutmeg State.
But then, new bank charters – MDI or not – have been notoriously difficult to come by in recent years. The FDIC has granted maybe half a dozen new bank charters since the recession, a stark contrast to the 100 or so it would grant annually in the years running up to the financial crisis.
“There has to be a change in the mindset of the FDIC to get back in the business of chartering new banks,” Carusone said.
Arce, meanwhile, thinks that Gateway Cities can be well-served by non-bank entities like community development financial institutions (CDFIs) and community development corporations (CDCs).
It may not totally shock the conscience that Massachusetts has so few minority depository institutions when taken into consideration that many of the commonwealth’s extant banks are more than 100 years old. Furthermore, as the Massachusetts Bankers Association points out, about 70 percent of Massachusetts-chartered banks are mutual institutions with a strong history of contributing to their communities.
That was why Arce ultimately wound up at Eastern Bank, he said, where he is now its vice president of business banking.
Arce said he was impressed that Eastern had locations in underserved markets like Lynn, Chelsea and Lowell, and had made investments in Gateway Cities, like Lawrence.
“Most community banks are community-oriented, but I think Eastern also believes in Gateway Cities and immigrant communities,” he said.
Email: lalix@thewarrengoup.com
