HOW TO PARTNER WITH NBA & MINORITY-OWNED BANKS
The NBA strongly endorses capital investments and other partnerships with minority-owned banks. Specifically, the NBA encourages allies in the fight against racial and economic injustice to consider the following priorities that would broadly benefit Black-owned banks and the communities they serve:
Mission-driven grants to strengthen the banks’ capital. Loan loss reserves to enable Black and other minority-owned banks to increase their lending to small businesses, nonprofits, and individuals.
Allies can support minority-owned banks and the work they do in their communities by introducing them into meaningful roles in their financial service supply chains.
Patient, non-dilutive stock investments with the terms covered by investment agreements that (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.
MORE EQUITY INVESTMENT OPPORTUNITIES
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 not upset existing shareholder voting dynamics.
Mission-driven grants to strengthen the banks’ capital and loan loss reserves to enable minority-owned banks to increase their lending to small businesses, nonprofits, 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 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.
Another way that banks create capital is through retained earnings. Allies can support minority-owned banks and the work they do in their communities by introducing them into meaningful roles in their financial service supply chains. Our banks would greatly benefit from being able to provide lines of credit, participate in corporate debt transactions, and perform services in the payments stream, all of which would serve to improve asset quality, boost earnings, and generate ongoing revenue that will support the sustainability of minority banks.
If minority-owned 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. To be sure, the NBA appreciates the recent expressions of interest in providing large-scale deposits to minority banks. Some members have need of low-cost deposits, but 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 actually 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.