The essential role of black banks in the development of the black economy

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Banks have long been at the heart of economic development. For example, think of American western films and television shows chronicling westward expansion. When a new city arose, one of the first institutions to spring up was a bank. Even today, a new residential or commercial development is inevitably accompanied by the appearance of a bank.

While the rise of (non-sovereign and sovereign) digital currencies serve as potential challengers to the traditional roles of banks in the economy, it appears that, at least in the case of the US, the traditional roles of banks can be preserved under a central bank digital currency.

If the latter is true, then black America should develop a new interest in banks and money and their importance for economic development. Why? Because the observation reveals a key aspect of the story about black America’s failure to move faster on the economic front.

What are banks doing?

Suffice it to say that banks (financial institutions) play a financial intermediary role in our spheres of influence (communities). That is, banks accept deposits from those who have no immediate intention of spending their money. Banks, in turn, use these deposits as a source of credit for those who want to invest or whose current money demand exceeds their current money supply.

The foregoing highlights the fundamental keys to economic development in our spheres of influence. Essentially, black Americans must deposit our excess funds (no matter how meager) with banks, and those banks must lend those funds selectively to those who wish to invest or meet other requirements. These conditions are necessary (“need to”) but not sufficient (a guarantee).

For the process just outlined to guarantee strong economic development in black spheres of influence, it is imperative that banks lend to blacks who intend to use the borrowed funds to increase development in our spheres of influence, either through investment or spending.

Black America’s fundamental problem isn’t that we don’t have enough access to money (although more would be better), it’s that we don’t have enough banks to deposit that money and not enough banks to give that money to black people Investors lend and donors once deposited. Let’s look at the status of black depositories compared to depositories of other ethnic groups in the United States.

Table 1 shows that Black Americans rank last among the top four non-white US ethnic groups in terms of bank formation and associated asset value that can benefit our spheres of influence. And because of this position, many of our spheres of influence are not developing optimally economically.

Given existing deposit insurance and banking regulation frameworks, black banks can safely expand the money available in our spheres of influence if those monies are deposited and then lent out for use in our spheres of influence. However, to ensure that there is a virtuous cycle of deposits and lending, banks must extend credit to investors and consumers who represent sound credit risk. The little-discussed fact is that we can control the level of risk. First, by vigorously and persistently patronizing these companies, we can ensure that borrowing investors can repay their loans. Second, we can ensure that borrowers can repay their loans by making sure they get stable jobs from thriving businesses in our spheres of influence.

A simple example should be instructive. In Step 1, there are black banks operating in a sphere of influence, and these banks have total deposits of $1,000. In step 2, the banks lend $500 of the $1,000 in deposits to investors and consumers. (Banks can take this step because depositors are unlikely to need all of the $1,000 in deposits immediately. Importantly, $500 is retained by the banks, not lent out, so that funds are available if depositors have some of their money need.) In Step 3: Investors and consumers who receive the $500 in loans pay back the borrowed $500 to black banks so they can later write checks to their new accounts for investment and consumption purposes. When we reach step 4, the total amount of deposits in black banks due to lending and deposit has increased from $1,000 to $1,500.

This process of depositing, lending, and depositing money creation can continue as long as banks are confident that they have sufficient funds to meet demand for deposits with their banks and as long as borrowers repay their loans. The more money (depots) there is in the black banks in our spheres of influence, the faster and more robustly the economy can develop in our spheres of influence.

There are three main factors preventing black America from implementing the favorable scenario just described. The first factor is that we have too few black banks (financial institutions). We discussed problems that would arise if black Americans contributed more of our money to the small number of currently existing Black banks here. Therefore, our first task should be to create more black banks. There is no point in continuing to complain about black companies failing because of a lack of access to finance capital and not creating banks that can provide that finance capital. Once black banks are formed with sufficient deposits, black companies that form automatically have access to finance capital.

The second factor hampering our economic development is our unwillingness to put our money in black banks. Table 1 shows the reality. Despite black Americans having over $1.6 trillion in annual spending power, black banks held just over $7 billion in assets at the end of March 2022 — a sizable portion of which was deposits. The creation of new black banks will be in vain unless we intend to invest our money in those banks. The current result is the result of historical experiences (financial and otherwise) that have caused distrust. We need to find ways to rebuild trust in each other and in black banks.

The third factor slowing or preventing our economic development is our weak support for black businesses. Again, this results from a lack of trust. Simply put, we can create black banks, and those banks can make loans to black businesses, but unless black Americans vigorously and persistently patronize those businesses, the entire economic growth ecosystem will collapse. Again, we must act (step by step) to restore confidence in black businesses so those businesses can thrive, create jobs for black Americans, and repay the funds they borrowed. This will make the entire machinery of economic growth run smoothly.

So black Americans should stop complaining that our spheres of influence are not developing economically. We know how to ensure economic development and growth: (1) Build solid black banks and invest our money in those banks; (2) ensure that black banks lend to black investors and consumers, who funnel that money back into our spheres of influence; and (3) vigorously and persistently supporting black businesses. Either we meet these three requirements or we remain economically underdeveloped forever.

The choice is ours.

dr Brooks Robinson is founder of BlackEconomics.org website.

References: 1 Data on the number and value of MDI assets by race and ethnicity is from the Federal Deposit Insurance Corporation; https://www.fdic.gov/regulations/resources/minority/mdi.html (Ret. 081522). Population estimates are from the US Department of Commerce, Bureau of the Census (Quick Facts) www.census.gov (Ret. 081722).

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