Preferred Stock
Patient, non-dilutive stock investments with the terms covered by investment agreements and (a) provide maximum financial flexibility for Black banks, (b) allow ally investors to maximize the amount of capital they can invest under Bank Holding Company Act guidelines, (c) are structured to be classified as Tier One Capital by the regulatory authorities, and (d) do not carry voting rights, conversion features, or otherwise interfere with control by current Black leadership, thus allowing the banks to preserve their character as Black institutions. Several large institutions are negotiating such stock purchases with some of our members.
Common Stock
Under the Bank Holding Company Act, common stock purchases must stay under 4.9% of total capital, which, in a vacuum, limits their overall utility to these small banks in need of capital. Paired with a preferred stock investment, however, a purchase of common shares can also augment minority bank capital in ways that are attractive to regulatory authorities. We urge preferred stock investors to augment their purchases with common stock investments, with voting rights structured so that new investors do no upset existing shareholder voting dynamics.
Grants
Mission-driven grants to strengthen the banks' capital and loan loss reserves to enable minority owned banks to increase their lending to small businesses, non-profits, and individuals, make critical investments in technology infrastructure, and provide additional financial education and technical assistance. One example is Morgan Stanley's grants of $24 million to three of our members. We believe grant capital can be especially effective for the smallest banks, where grants can immediately inject meaningful amounts of growth capital without triggering Bank Holding Company Act concerns or inadvertently creating additional reporting or regulatory burdens for smaller bank management teams.
Equity Funds
Many large entities outside of the banking world, such as companies in retail, technology, transportation, entertainment, or even foundations, can see the transformative potential of investing in minority-owned banks, but may not be able to hold direct, relatively small equity investments in individual minority banks on their balance sheets. For these entities, capital aggregators such as equity funds that are focused on minority banks, MDIs, and CDFIs, should be considered. Of particular interest are funds that will offer additional support to minority banks in the form of revenue-generating opportunities and operational consulting to assist in meeting higher return hurdles.