Capital and Equity Investments
Patient, non-dilutive stock investments with the terms covered by investment agreements provide the following benefits: (a) provide maximum financial flexibility, (b) allow 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 MDI Several large institutions are negotiating such stock purchases with some of our members.
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.
Mission-driven grants strengthen the banks' capital and loan loss reserves to enable MDIs 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.
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 or -operated banks but may not be able to hold direct small equity investments in MDIs on their balance sheets. For these entities, capital aggregators such as equity funds that are focused on MDIs, and CDFIs, should be considered. Of particular interest are funds that will offer additional support to minority-owned and -operated banks in the form of revenue-generating opportunities and operational consulting to assist in meeting higher return hurdles.
Another way that banks create capital is through retained earnings. Partners can support MDIs and the work they do in their communities by introducing them into their financial service supply chains. Our member banks would benefit from providing lines of credit, participating in corporate debt transactions, and performing services in payment streams all of which improve their asset quality, boost earnings, and generate ongoing revenue.
If minority-owned and -operated banks are able to increase equity capital, low-cost, long-term deposits will be needed to fund the credit needs of the communities our members serve. Of course, the NBA appreciates the recent interest in providing large-scale deposits to minority banks. Some members have a need for low-cost deposits. However, deposits are actually liabilities on bank balance sheets and serve to dilute the limited capital bases of many of our members. Because of this fact, increasing deposits without first increasing our capital bases can weaken our banks instead of strengthening them. For every $1 in equity, we will be able to take in roughly $10 in deposits and then be strengthened in our ability to provide this capital to our communities. We encourage well-meaning depositors to consider equity investments, followed by revenue opportunities and then deposits.
Our strategic partners and advisory councils are dedicated to helping us end the racial wealth gap.
Our Strategic Partners
We thank our partners for supporting our mission.
If you’re not an MDI but are interested in supporting our mission of eliminating the racial wealth gap, we want to hear from you. Partners have access to hosting various highly-visible programs and events and opportunities to interact with MDI leaders, regulators, and other stakeholders.
A strategic partnership with the Association provides your organization with access and visibility to MDI leaders, regulators, and other financial stakeholders.
Strategic Advisory Council
We thank our advisors for their support.