Black financial institutions and urban revitalization

BLACK FINANCIAL INSTITUTIONS AND URBAN REVITALIZATION

Harold Black

The role of financial institutions in the processes of urban revitalization and economic development can be addressed from two perspectives. The first involves discussion of the institution operating within the urban environment. The second considers the role of the government on the local, state, and federal levels in encouraging financial institutions to actively participate in urban redevelopment financing. The purpose of this paper is to consider the role of minority institutions, majority institutions, and the government in the area of urban revitalization.

MINORITY-OWNED FINANCIAL INSTITUTIONS

The status of minority-owned financial institutions has been critically examined in various studies. 1 Generally, it is concluded that such institutions are beset with difficulties that result in poor economic performance relative to the performance of majority-owned institutions. Those difficulties include higher operating costs resulting from small, active accounts and small loans that have a high risk profile. Moreover, the volatility of deposits and the size of loans are asserted to force minority institutions to maintain high liquidity, which reduces earnings, z Those factors imply, cet. par., that improving the performance characteristics of minority-owned financial institutions depends on changing the banking- related habits of their customers, rather than alerting the portfolio behavior of management)

The viability of these institutions is important from the standpoint of community development. Most are located in predominately black neighborhoods and seek to actively serve predominately black clientele. Previ- ous studies have yielded consistent results but with differing conclusions. Although one is pessimistic about the viability of these institutions and

URBAN REVITALIZATION 45

their ability to function effect ively, 4 others are more optimistic. 5 Minority-owned institutions serve an important role in the community and to serve this role effectively must be viable. Whites do not seek to open new banks in black communities; those who have remained after a change in the racial composition of the primary service area either attempt to relocate or do not interact with residents to any large extent, n

Previous research has shown that black banks and savings and loan associations have similar performance characteristics. When compared with majority institutions they have:

1. Smaller, more active, less profitable accounts. 2. More employees per deposit dollar. 3. Higher revenues from service charges and more fee income from

sales of money orders. 4. Lower interest expense on deposit accounts. 5. Higher loan losses. 6. More liquid assets. 7. More real estate and few commercial loans. 8. Less capital per deposit dollar. 9. Less return on capital.

10. Lower profitability. 11. A greater reliance on government funds as a source of deposits.

It is generally the case that the total operating income of black institutions is not significantly different from that of white institutions. More- over, as noted by Bradford for S&L's and by Black for banks, r the difference between total operating income and interest paid on deposits is significantly greater for the minority-owned institutions. That does not imply greater profitability, however, due to the significantly higher expenses of minority institutions. Indeed, the lower interest paid on deposits is due to the existence of small active accounts whose volatility implies a lower return to savers due to the imposition of interest penalties.

It has been argued elsewhere that this poor performance is in part due to the low economic condition of the primary service area (PSA).a However, recent research has demonstrated otherwise. 9 It is apparent that the loca- tion of the bank will affect profitability but not viability, that is, banks and S&Ls located in predominately black service areas that seek business outside those areas will be less profitable than majority institutions, but will be viable.

46 The Review of Black Political Economy

Moreover, previous research has pointed to alterations in commercial banks' portfolios over time, with shifts in residential populations postu- lated as one reason. 1~ Given that, in many cases, restrictions on branching prohibit banks from following population shifts from the central city to the suburbs, central city banks tend to concentrate on the business market while suburban banks concentrate on the retail market. That would imply that a central city bank that continued to concentrate on the retail market would find itself in a less profitable situation. In addition, recent legislation that provides for increased competition for traditional consumer financial services by nonbanks has an adverse impact on those banks that specialize in the provision of consumer services. Indeed, recent financial reform as embodied in the Financial Institutions Regulatory and Interest Rate Control Authority Act of 1978 could lead to a weak- ening of the profitability of consumer-oriented banks.

Given that Act and the recent trend toward the payment of interest on demand deposits, extending deposit powers to nonbanks, liberalizing branching statutes, and improved technology to deliver financial services, consumer-oriented banks are experiencing increased competition in areas that were once their exclusive province. Moreover, finance companies, life insurance companies, investment companies, retailers, and credit card companies have recently entered that market for consumer financial services, impacting even more on bank profitability. Thus, at a minimum, banks that are heavily dependent upon the retail market will be forced to consider business orientation as a matter of survival.

What does the above imply for black-owned banks? Those banks are situated within central cities and have strong consumer-orientations. Un- like majority-owned banks located within cities, black-owned institutions have not generally sought to expand their business loans through partici- pations, nor have they actively sought to maintain customer relationships with customers who move outside the primary service area. Indeed, one black banker told this writer that black banks are subject to a constant filtering process, that is, as one group of customers become educated to "proper" banking habits and as their income rises, they become upward mobile and move outside PSA and change banks. Some have attributed this changing of banks to a demonstration effect. Specifically, it is an indication that the banking customer shows the change in social status by changing banks. The filtering process occurs as these " g o o d " customers are replaced by new residents of the urban area who are low income and not well versed in banking habits.


Thus, these banks will undoubtedly find themselves in more dire straits due to the increased competition for consumer services from nonbanks. This is because the more sophisticated customer currently banking in the minority bank will be attracted to the offerings of the nonbanks who generally enter the market with lower service charges, lower interest charges on loans, and higher interest payments on deposits. Conse- quently, the adverse impact of financial reform could be greatest on those institutions least able to effectively compete.

Currently, the inferior status of minority banks is explained by two factors. First, high deposit volatility leads to several important differences between the performance of minority banks and matched sample banks. High deposits volatility on smaller accounts would explain the higher service charges, the lower interest paid on deposits, the higher employee expenses, the higher Fed funds sold, and the greater liquidity.

Nevertheless, that does not account for the higher loan loss provisions. That is explained by the poorer quality of loans made by minority banks. More successful minority banks concentrate on real estate lending and not on small customer and business loans. 11 Indeed, the major item in the bank's portfolio that distinguishes nonprofitable minority banks from either majority banks or profitable minority banks is loan loss from business loans. For example, new minority banks experience significant losses on commercial and industrial loans whereas new nonminority banks do not. TM Loan losses, especially business-related loan losses, have impaired the profitability of black banks and in so doing prevent them from being an effective force for community development. 13 It is also apparent that minority bank managers soon realize the weakness in the business loan, for older banks hold six percent of their assets in these loans while newer institutions hold 19 percent of their assets in business l o a n s .14

Examples of the impact of bad loans on minority banks are readily apparent. In 1971, Cross wrote that "the strongest and most aggressive black credit institution operating in the American ghetto today . . , is Harlem's Freedom National B a n k . . . Freedom National claims to have made more Small Business Administration-insured loans to Negro busi- nessmen than any other bank in the country. A television p r o g r a m . . . reported dozens of commercial loans made by Freedom National . . . . all of these loans had previously been declined by the large metropolitan banks of New York City."15 Yet Freedom National was later forced to write off $900,000 in bad loans and was threatened with insolvency.


Other prominent examples are Skyline National Bank of Denver and the Unity Bank of Roxbury, Massachusetts.

In addition to the weakness in the loan portfolio, Freedom National was heavily involved in mortgages. The bank at one point had 55 percent of its assets in mortgages. TM Although it may be the case that dollars are fungi- ble for larger institutions, certainly a bank as small as Freedom with only $30 million in assets should consider a more balanced matching of its short-term deposit liabilities with its asset portfolio.

Nevertheless, given the risk of default, mortgages are on average less risky than small business loans. Mortgages are secured by real estate. Consumer loans are secured by personal chattel. Commercial loans are inherently dependent upon managerial expertise. Such loans are especially risky when made to new or small businesses and may be required to be secured by personal property or real estate.

Traditionally, four-fifths of all new businesses fail within five years. Also, black businesses are typically small businesses. In 1972 the Census Bureau reported 194,000 black-owned businesses. Of these, only 32,000 had paid employees. ~7 Indeed the average number of workers per firm was six and those firms provided employment for only 2.5 percent of all black workers in the economy. It is also noteworthy to mention that the salary of self-employed Blacks was only 60 percent of black craftsmen employed by nonminority enterprises.

It is not surprising that black financial institutions look to the government for assistance via insurance. Blark banks and S&Ls hold large percentages of FHA-HUD insured mortgages and SBA insured loans. However, it is well known that the time delays and paperwork involved in such programs often renders such loans more costly to the institution than noninsured conventional loans. Nevertheless, given their clientele black-owned institutions have little alternative than to lend with federal insurance.

So what can be done? The choices appear to be as follows: greater participation by majority lenders and a lessening of market restrictions and disincentives by the government. The following sections examine these alternatives.

MAJORITY-OWNED INSTITUTIONS

An example of majority participation is given by Young. TM He discusses the Philadelphia Plan and its impact on the inner city. Here 14 major financial institutions provide mortgage financing to creditworthy applicants seeking


to purchase older houses. The plan excludes from consideration severely deteriorated neighborhoods and areas requiring extensive rehabilitation. Those areas excluded can be assisted only through government, rather than private, programs. Young notes that as of September 1977 there have been 4,268 applications and 2,569 acceptances. Eighty percent of the mortgages are $15,000 or less and have been made to individuals that under most credit criteria would have been rejected.

Although it is probably correct to say that the program is relatively costly due to the time involved in counselling applicants and processing applications, larger more profitable institutions are better able to bear such costs than are smaller, less profitable ones. Other px, qrams involving community revitalization have been instituted by the t~ank c,f America, Chemical Bank, Citibank, and North Carolina National Bank. Such programs include the granting of home improvement loans collaterialized by the local government, the purchase of local bonds whose proceeds go toward housing loans, and the provision of after hours counselling services.

While the impact of such activities on the profitability of these large banks is negligible, such is not true for many small banks. For example, South Shore National Bank of Chicago has made an impressive effort in community revitalization. The bank's previous owners stated that the bank was not a public agency established to solve community problems at the expense of stockholders. The new owners of the bank sought to take advantage of the 1972 ruling by the Federal Reserve Board that a bank holding company could make equity and debt investments in corporations on projects designed primarily to promote community welfare, such as the economic rehabilitation and development of low income areas. To this end, the new owners formed the Neighborhood Development Center. Non- lending activities include classes on balancing check books and large donations of staff time to groups in the service area. The bank is also involved heavily in lending in the service area. Although it is generally felt that the bank has been successful in its efforts to bean active participant in the community of the South Shore, that participation has not been without cost. South Shore is not as profitable now as it was before the change in ownership. Its 1976 return on assets was only .25 percent and was a concern to the bank regulators. It is interesting to note that if the bank had not incurred development expenses of $117,000 and fraud costs of $90,000 its return on assets would have been .62 percent. The bank has also had problems with loan delinquency on insured loans, with less delinquency problems on noninsured loans. Recently~ South Shore has taken steps to improve its profitability and its loan portfolio but undoubtedly its dedica-


tion to community rehabilitation has affected its viability in terms of safety and soundness.

Thus, one must analyze the lending practices of small neighborhood institutions. These will carry loans on its books that would be considered as being too risky by larger institutions. The reason is that the smaller institution would have a more intimate knowledge of the particular neighborhood and the applicant. Consequently, although the possibility exists that the small lender would have higher delinquencies, it is a non sequitur to assert that the institution would have higher foreclosures. This may mean that regulators may wish to consider alteration of rules concerning doubtful and substandard loans.

An alternative would be for the neighborhood-based lender to actively participate in the secondary market, initiating, servicing, and brokering loans for larger lenders and the national market. However, the small average size of the loan may preclude this activity. This presents some problems. For rehabilitation loans to have a secondary market and to be purchased by Freddie Mac (the Federal Home Loan Mortgage Corpora- tion), they must be saleable by means of mortgage backed securities. The transactions costs would be prohibitive. The per loan processing and accounting costs are fixed per loan regardless of the size of the loan. A $100 million pool of mortgages contains on average 3,000 or fewer individual loans. A similar pool of home improvement loans would contain on average 20,000 loans. That means that the transactions costs on the latter would be around seven times as large as the cost on the former. Given the narrow spreads in secondary markets, the secondary sales of mortgage- type securities backed by home improvement loans would be uneconomi- cal.

An alternative would be for a multiple-owned service corporation similar to the Philadelphia Plan that would originate and service the loans locally. The lenders with the expertise would staff the corporation and allocate the loans to the other lenders (owners). This would be akin to having a local secondary market.

A suggestion in this vein has been made by this writer and Lewis Mandell. That plan involves local lenders as well as the government. It is as follows. Supply barriers to credit are best solved through the deregulation of the financial system than through increased regulation. This conclusion is derived by an examination of both theoretical principles and empirical research that will be outlined in the next section. However, the suggested program explicitly rejects the notion of preferential access to real estate financing for inner-city neighborhoods. This rejection stems from the


notion that preferential access assumes that financing is the crucial element in reversing neighborhood decline. This is not generally the case. Pumping credit into a neighborhood may treat the symptoms but not the causes of decline.

The blight of neighborhood deterioration cannot be arrested simply by increasing the availability of loans to the community. Funding, whether insured or guaranteed, will not have an impact on the more complicated causes of housing, employment, education, and other social problems.

In cases where supply generated redlining TM exists, supply constraints divert some real estate credit to areas other than older urban neighborhoods. No rational supplier of real estate financing will rject an investment which carries a return sufficient to "buy off" its risk. Thus the lender will be indifferent between a lower return, lower risk and higher return, higher risk investment. The supply of real estate financing becomes constrained when lenders are precluded from charging a rate high enough to compensate for risky loans. If this is the case, the lender will decline to make higher risk loans. Since these loans are most often associated with older urban properties, supply constraints generate a redlining situation. This is termed the "supply constraint" hypothesis.

I. Specific barriers to supply. A. Legal and Regulatory policies.

1. State usury laws--The academic research in this area conforms to economic theory in that it is found that where usury ceilings are below market rates, then all types of lending are curtailed. There is a differential impact however, in that lending does not cease. Rather, financial institutions service their best customers at the ceiling. In the case of mortgage lending where there is a differential risk perceived for the property as well as for the individual, it is highly probable that borrowers with equal risk will be discriminated against by the lenders on the basis of the riskiness attached to the property. Consequently, areas of high perceived risk will not be serviced if the risk premium places the interest rate above the usury ceiling.

2. State and local building codes--If building codes and zoning restrictions create artificially higher costs for rehabilitating property, then such property becomes less desirable. It is less desirable from the borrowers viewpoint in that the higher price means that the quantity of such housing is less. It is less desirable from the lenders viewpoint as well in that the higher cost of


the property decreases the likelihood of resale in the event of foreclosure or increases the probability of loss in the event of resell (if foreclosure occurs).

B. Regulatory Constraints. It has shown that the reserve requirements imposed by the Fed-

eral Reserve result in higher prices for banking services, greater liquidity, and a concommitant smaller generation of credit. This is especially true of smaller neighborhood or community banks. Studies have shown that banks leaving the Federal Reserve System do increase their mortgage lending. 2~

The question asking whether convenience and needs imply that all fed- erally chartered institutions give some priority to the residential credit needs of persons in their service areas is answerable in several parts. First, singling out residential credit needs overlooks the other important needs and convenience of the primary service area. Banks employ mem- bers of the community, invest in municipal securities, services depositors and borrowers whose interests do not necessarily coincide. Banks also attract funds from outside its primary service areas and lend outside as well. Residential lending is a part, but of necessity a small part of the role played by the bank as a lending institution.

APPROACHES TO OVERCOMING SUPPLY BARRIERS

Use of the Regulatory System to Allocate Credit

If the "supply constraint" hypothesis is valid the situation can be remedied by redirecting the constraints of the system to encourage the supply of real estate financing to older urban neighborhoods. This involves the utilization of deposit rate ceilings, usury laws, reserve requirements and Federal insurance in a manner that channels funds into older urban neighborhoods. This approach carries certain problems. First although credit allocation is inimical to a freely functioning market, it is already present in the society. Banks cannot make mortgages in excess of their time and savings deposits. There are legal limitations on primary lenders that concern area and geographic restrictions. Savings and loan associations can lend funds within their states but no more than 15 percent outside the state. S&L's in the District of Columbia can lend only within a 100-mile radius of the central office. Second, the market is always flexi- ble enough to offer sufficient loopholes to the profit seeker who wishes to


circumvent a constraint. Indeed, redlining is arbitrary credit allocation by lenders. There is no logic to remedying this by more credit allocation. Secondly, and more specific to the real estate financing process, is the state of the current financial system. The regulation of the financial services industry has produced a situation in which real estate financing is an inferior investment and the major real estate lenders are virtual wards of the Federal government. All initiatives toward reform of the financial sector are aimed at reducing restrictions, not increasing them.

Third, this approach encourages the use of social engineering. If this is the case, the entire course of legislation concerning intermediaries, which has carefully separated financial institutions from other types of com- merce, would need to be overturned. Additionally, considering intermediaries as extensions of Federal power sets a dangerous percedent. Finally existing research cited below suggests that the impact of Federal legislation has been to increase costs and curtail real estate lending by financial intermediaries.

Freeing of the Market

A more appealing solution to the problem is one which conforms to a free market process. Such a plan would have the following features:

1. Encouragement of applications from the inner city. It is the responsi- bility of the government to make it well known to residents of inner cities that discrimination in the granting of mortgages is illegal and that the government has programs to detect discrimination. In addition, information should be provided about the types and locations of institutions that provide loans. This effort should encourage hitherto discouraged persons to submit applications for home mortgages and eliminate a great deal of the "prescreening," which is a far more serious deterrent to home ownership by inner city persons than the rejection by financial institutions.

2. Processing of applications. Banks and other financial institutions would continue to retain certain stated minimum conditions for a conventional mortgage (such as down-payment requirements) but would be required to process applications from areas that might be traditionally redlined. The bank will process the application in a nor- mal manner by running a credit check, verifying information, and assessing the property. The cost of this work will be borne partly by the applicant through a nominal fee to discourage nonserious applications, and partly by the government.


3. Mortgage "auctions." Once processed by the receiving bank, the applications will be sent to the local government housing office, where applications could be rejected based upon a poor credit check or mis- information on the application.

All eligible applications will then be reproduced and distributed peri- odically (monthly, biweekly) to all financial institutions interested in bidding. Bidding will be in terms of percent rate of interest. The difference between the rate bid and the market rate on conventional mortgages would be the risk premium. The institution willing to accept a mortgage with the lowest rate of interest bid would be given that mortgage, except that preference will be given to the originating institution if its bid is within 1/~ point of the lowest bid. This last incentive is to make institutions more aggressive in seeking applications.

4. Subsidization. The government would subsidize mortgages by paying the risk premium, which is the difference between the lowest bid and the market rate. It is understood, however, that the government need not accept the lowest bid on a certain mortgage if the bid exceeds a reasonable level or if funds are limited for subsidization. In the latter case, the government may choose to concentrate its funds in particular areas.

The subsidy will continue for the life of the loan which may not be transferred to other borrowers, although sale to other lenders through FNMA, GNMA, or otherwise would not be prohibited. Foreclosure or termination for any reason will result in termination of the subsidy, so that there will be a strong incentive for the lender to do everything possible to continue the mortgage in order to earn a rate of return above that offered by other investments.

5. Information feedback. As mortgages are made in inner-city neighborhoods, the information will be tabulated and fed back to the par- ticipating institutions. It is expected that the "risk premium" of the first mortgage made in a hitherto "redl ined" neighborhood will be quite high. However, subsequent risk premiums should decrease until conventional mortgages can again be made in the neighborhood. The feedback of accurate information is an integral part of this process.

Aside from the responsibilities mentioned above, the only remaining governmental functions would be the prevention of collusion among financial institutions, which is a possibility, and the continual


monitoring of financial institutions for discrimination, which is already being done by most of the banking agencies.

While the exact details of such a plan are negotiable, the thrust of the plan is crucial. Such a plan accompanied by the relaxation of the legal and regulatory barriers discussed above would go far to reverse any flow of real estate credit from older urban neighborhoods. The key point here is that this approach allows markets forces to work themselves out and then allows public policy to identify and compensate those hurt by market forces. The alternative, preferential access, requires the manipulation of the market to force behavior which is favorable to those with weakest market power. With this latter approach economic units (read "financial institutions") leave the market (read "reduce lending to older neighborhoods"), inefficiencies result, and the collective welfare is reduced.

THE ROLE OF GOVERNMENT

Some roles that can be undertaken by government on all levels have been outlined above. First, on the federal level there could be an effort to lessen the amount of bureaucratic red tape and delays associated with insured loans. Given that black financial institutions make the majority of their mortgages and business loans with guarantees, such a lessening would reduce the burdens on these institutions. Second, the bank regulators could reexamine their minimum safety and soundness requirements realizing that delinquency in the loan portfolio does not imply that the loan will be written off in the future. Also allowing additional banks to count government securities as reserves or allowing the Federal Re- serve to pay interest on required reserves would benefit minority institutions. Third, multiple-service corporations could be encouraged similar to the Philadelphia Plan and the proposal outlined above. In the case of the former, the local government could reexamine its zoning and building codes, although this could bring forth opposition from neighborhood groups and labor unions. In the case of the latter, a subsidy based on the risk premium could be enacted. An additional benefit of a service corporation would be the lessening of information costs.

Given that risk is the primary determinant of redlining--except where redlining is overt and irrational--approaches to the problem should include the provision of information that reduces search costs for the lender. This assumes that the lender would make the loan to an individual but wrongly perceives the riskiness of the neighborhood. It simply may be too


costly for the individual lender to investigate the probability of the risk of a loan to a particular borrower on a particular piece of property. Given that default is rational regardless of the ability to repay when the value of the property falls below the balance of the loan, this is an important problem. As a result, some areas may be rejected out of hand as being too risky. The existence of accurate information would alleviate this problem. It would therefore be in the public interest for the government(s) to actively seek to reduce the cost of information by encouraging service corporations that specialize in the assessment of risk of both the borrower and the property. 21

As to the removal of artificial constraints, the three that come readily to mind are taxes, usury ceilings, and minimum wages3 2 Given the dearth of equity capital in black-owned businesses and the income of black households, one cannot look to Blacks to forego present consumption to save in the equity capital of black businesses. Such savings is subject to triple taxation through capital gains taxes, corporate income taxes, and inflation. What is proposed here is a call for an end to the capital gains tax, an end to the taxation of savings, and an indexing of the income tax schedules. Such actions would encourage more savings and investment in the economy in general and in black businesses in particular, with obvi- ous benefits to Blacks through gains in employment and income.

Usury laws encourage "perverse" credit allocation. Schafer states that "The New York State usury ceiling hurts, rather than helps, the individuals it is intended to protect; namely, the 'borrowers of limited means, ' or individuals buying one and two-family homes. The state usury ceiling limits the investment opportunities of these people, while leading to greater investment opportunities for corporate borrowers, purchasers of multifamily buildings and other real estate, and out-of-state mortgage seekers. ' ,23

Legal restrictions and red tape involved in many insured loans actively discourage commercial bank lending in certain areas. Usury statutes typically do not apply to loans made to corporations but do apply to loans made to individuals and on mortgages on single family dwellings. In periods of rising market rates above usury ceilings, there is a strong deterent to the making of a mortgage loan or a consumer loan particularly when there is no such limitation on the interest charged to corporations.

Moreover, recent consumer legislation has resulted in the creation of extremely detailed, complex, and costly burdens on lenders. The Home Mortgage Disclosure Act requires that lenders disclose publically their


investment in residential mortgages and home improvement loans in different geographical areas. That legislation has served little overall useful purpose. It has increased that costs o f providing housing f inance without apparent benefit to lenders or to borrowers.

It should also be emphasized that banks explicitly seek to serve different clienteles. Some banks are chartered to serve primari ly the local community in which they reside. Other banks serve a broader regional or national market. Some banks have business orientations while others are consumer-oriented. These orientations may develop over t ime shaped by market forces while others may be chartered with the express purpose o f serving a particular market. For example , the American Indian National Bank chartered in Washington, D.C. was not established to make the majority of its loans to local residents. However , strict adherence to the Community Reinvestment Act would compel it to do so.

The revitalization of the cities is not aided by legislation that is perverse in its impact. The cost burden of lending should be lessened rather than increased as is the present trend. Revital ization depends on an unshack- eling of the marketplace rather than the converse. The role of gov- ernments is the lessening of these burdens. The role of financial institutions is to serve its depositors by investing in the communi ty fol lowing sound investment policies that add stability to the institution.

NOTES

1. A minority institution is defined as one with more than 50 percent minority (or female) representation on its board of directors and/or with 50 percent or more of its stock minority-owned.

2. W.D. Bradford, "Performance and Problems of Minority-Controlled S&L's," Fed- eral Home Loan Bank Board Journal, 9, August 1976, p. 21; J.M. Ducker and T.G. Morton, "Black-Owned Banks: Issues and Recommendations," The Review of Black Political Economy, 6, Winter 1976, p. 163.

3. The conditions imply that bank management is operating in a manner dependent upon the behavior of its customers. Therefore, the question arises as to the validity of this assumption, viz., must management necessarily maintain highly liquid portfolios with smaller returns because of the presence of small active accounts? And, must the loan portfolio consist of mostly small consumer and business loans due to the economic status of the primary service area?

4. See A.F. Brimmer, "The Black Banks: An Assessment of Performance and Pros- pects," Journal of Finance, 26, May 1971, pp. 379-405.

5. H. Black, "'An Analysis of Minority Banks," Reaearch Paper 77• Comptroller of the Currency, Washington, D.C., 1977; J.T. Boorman, "The Prospects For Minority-Owned Commercial Banks: A Comperative Analysis," Journal of Bank Re- search, 5, Winter 1974, pp. 263-79; J.T. Boorman and M.L. Kwast, "The Start-Up Experience of Minority-Owned Commercial Banks: A Comparative Analysis," Journal


of Finance, 29, September 1974, pp. 1123-41. 6. On this point see T.V. Wright, A Comparative Performance Analysis of Black-

Owned Commercial Banks and White-Owned Commercial Banks Located in Black Com- munities in Unit Banking States in 1973, Unpublished Dissertation, Washington Univer- sity, St. Louis, Mo., 1976.

Of course the South Shore National Bank of Chicago is an exception to this. Yet the implication is clear that white bankers do not consider black communities as being desirable locations for the establishment of de novo facilities.

7. Bradford, op. cir.; Black, op. cit. 8. Brimmer, op. cit. 9. K. Currie, M. Esbitt and N. Nicholson, "Minority Bank Performance: Some Fur-

ther Evidence," Unpublished Manuscript, Undated; Wright, op. cir. 10. H. Black, "The Dichotomization of Bank Markets Given Time: The Case of

Washington, D.C.," Journal of Bank Research, 8, Winter 1978, pp. 242-48. 11. Black, "An Analysis . . . . " p. 8. 12. M.L. Kwast, "New Minority-Owned Commercial Banks: A Statistical Analysis,"

Unpublished Manuscript, October 1978, p. 14. 13. J.T. Boorman, "The Recent Loan Loss Experience of New Minority-Owned

Commercial Banks," FDIC Working Paper 74-76, 1974, p. 44. 14. T. Bates and W.D. Bradford, "Lending Activities of Black-Owned Financial

Institutions," Unpublished Manuscript, Undated, p. 28. 15. T. Cross, Black Capitalism, (New York: Anthenuem, 1971). 16. J.B. Llewellyn, "The Problem of Business Operations in the Ghetto," in Minority

Business Development, (Boston: Federal Reserve Bank of Boston, 1976), p. 44. 17. A.F. Brimmer, "Economic Growth, Income Trends, and Prospects for Black-

Owned Business," in Minority Business Development, p. 30. 18. E. Young, "An Approach to Neighborhood Preservation--From Redlining to

Reinvestment," Speech prepared for the Economic Seminar, National Urban League/ Federal Reserve Bank of Atlanta, November 1977.

19. Redlining is defined as geographic discrimination and occurs because the lender perceives an area, rightly or wrongly, to be one of high risk. Importantly it is the area rather than the individual who is being discriminated against.

20. D.R. Fraser, P.S. Rose and G.L. Schugart. "Federal Reserve Membership and Bank Performance: The Evidence from Texas," Journal of Finance, 30, May 1975, pp. 641-58.

21. It has also been argued that redlining does not involve only the rejection of applications but also the acceptance of the application with adverse terms. Presemably this means that the terms granted are in excess of the risk premium. Research on this proposi- tion finds no empirical confirmation that discrimination in the provision of terms exists. For example see J.L. Benston, D. Horsky, and H.M. Weingartner, "An Empirical Study of Mortgage Redlining," Monograph 1978-5, Monograph Series in Finance and Eco- nomics, New York University, 1978 and R. Schafer, Mortgage Lending Decisions: Criteria and Constraints, Vol. 1, (Cambridge, MA: Joint Center for Urban Studies, 1978). However research has revealed some evidence of racial discrimination. See H. Black, R.L. Schweitzes and L. Mandeel, "Discrimination in Mortgage Lending," American Economic Review, 68, May 1978, pp, 186-91.

22. C. Carter, "The New Minimum Wage: A Threat to Southeastern Jobs," Economic Review, Federal Reserve Bank of Atlanta, March/April 1978.

23. Schafer, op. cit., p. II-54.

Black financial institutions and urban revitalization

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