Black-Owned Banks May Gain from Social Change

May 31, 2021
Black businessman signs a financial document.

While the number of Black-owned banks has been declining, growing calls for racial equity are having an impact on minority-owned depository institutions (MDIs), according to a Regional Economist article by St. Louis Fed Business Economist Eldar Beiseitov.

Like other community banks, Black-owned banks have a strong understanding of the communities they serve, and many of these banks serve low- to moderate-income communities, Beiseitov wrote. Although the number of Black-owned banks in the U.S. is small compared with the number of U.S. commercial banks, MDIs substantially affect their communities, particularly by providing mortgages and small-business loans.

Borrowing Challenges Facing Black Entrepreneurs

While white- and Black-owned firms apply for loans at about the same rate, Black entrepreneurs are denied at markedly higher rates, the author noted.

“More than one-third (38%) of Black business owners reported being discouraged and not applying for loans because they perceived the likelihood of loan approval to be small. Among white-owned firms, only 13% reported being discouraged,” Beiseitov wrote.

To access capital, Black entrepreneurs use personal savings and financial backing from friends and relatives. Beiseitov noted that less than 25% of Black-owned businesses were loan customers with a bank in 2019.

Slower Pandemic Relief Loan Approvals

Relief from the COVID-19 pandemic through the federal Paycheck Protection Program (PPP) was slow to arrive for Black communities. The author found that 80% of PPP loans approved in white areas of select Midwestern cities were approved within seven weeks after the PPP launched on April 3, 2020. It took 18 weeks for businesses in majority-Black ZIP codes to reach a similar percentage of loan approval.

PPP Loan Approvals by Racial Composition within ZIP Codes

NOTE: Paycheck Protection Program loan data through Aug. 8 (less than $150,000 to businesses in the states of the Eighth District).

SOURCES: Small Business Administration and author's calculations.

Shrinking Number of Black-owned Banks

Black-owned banks also faced challenges after the Great Recession, Beiseitov wrote.

“The years after 2008 were marked by a wave of mergers, acquisitions and failures within the banking sector,” he explained.

From 2001 to 2007, the number of Black-owned banks declined from 48 to 44, followed by a 50% decrease of 50% after the Great Recession. By mid-2020, there were only 20 Black-owned banks in the U.S., with combined total assets of $5.45 billion. By contrast, commercial banks number more than 5,000, with the largest bank in the U.S., JPMorgan Chase & Co., holding assets of $2.8 trillion.

Black-Owned Banks and Their Headquarters

New Resurgence

But Beiseitov noted that calls for racial economic equity, including #BankBlack, have increased after the police killings of African Americans George Floyd and Breonna Taylor last year.

“The #BankBlack movement is already having an impact, with some banks reporting an enormous uptick in deposits. The rise in deposits is attributed to a wave of new individual customers and nonprofit and community organizations that now choose Black-owned banks and credit unions,” Beiseitov wrote.

Corporations also promised to make more deposits with Black-owned banks, he added.

Small banks may struggle to lend out such a large influx of deposits, the author suggests. The problem could be remedied by large banks that have announced equity investments for Black financial institutions. That investment could enable Black-owned banks to improve their technological infrastructure.

The investment could also help Black-owned banks weather an expected increase in the shares of nonperforming real estate and small-business loans caused by the pandemic.

“Scholars and policymakers agree that encouraging greater access to mainstream financial services is critical to closing the racial wealth gap,” Beiseitov wrote. “Black-owned banks have demonstrated an unwavering commitment to their communities and could play a vital role in equitable economic recovery.”

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This blog offers relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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