Bank Closures Hit Harder in Poor Neighborhoods
Given the recession, it is not surprising that the number of bank branches in the United States decreased for the first time in 15 years last year. Closures have been particularly prevalent in low-income neighborhoods. As banks closed branches in poorer areas in response to shrinking profit margins, they opened new branches in wealthier ones. Between 2008 and 2010, the number of branches in areas with median household incomes below $50,000 fell by 396. During the same period, 82 new branches were added in neighborhoods where household income was above $100,000. Although the American Bankers’ Association has disputed the statistical significance of this data, citing the fact that there are over 95,000 bank branches nationwide, this does not disprove that there is a pattern.
For example, Birmingham-based Regions Financial, with a pool of only 2,000 branches, closed 107 branches in low- and moderate-income neighborhoods between 2008 and 2010, but closed only one in a high-income neighborhood. Similarly, Bank of America closed 25 branches in lower-income areas while opening 14 in wealthier areas. Citigroup also closed two branches in the poorest areas they served and opened three in the wealthiest. In fact, Citigroup has made very little effort to hide its intention to focus on wealthy markets. At a Wall Street investor conference last November, Manuel Medina-Mora, head of Global Consumer Business, revealed that Citigroup would expand its retail banking primarily in “affluent segments in major cities.”
Branch closures have been more prevalent in low income neighborhoods despite Community Reinvestment Act regulations in place since 1977, requiring financial institutions to serve poor and middle-class credit markets. These regulations also require financial institutions to notify regulators of branch closings. Federal regulators, however, seem to have turned a blind eye to bank branch closure patterns.
According to John Taylor, President of the National Community Reinvestment Coalition, “You don’t have to be a statistician to see that there’s a dual financial system in America, one for essentially middle- and high-income consumers, and another one for the people that can least afford it.” If bank branches continue to close in low-income neighborhoods, the options available to low-income families will continue to dwindle.
Even after the economy improves and the consequences of the mortgage bust subside, closures are likely to continue in the long run due to increased use of online and automated banking systems. Bank branches in lower-income neighborhoods will be at particular risk because new regulations, including those limiting overdraft fees, have stripped banks of major revenue sources earned from products marketed towards low-income clients. Without brick-and-mortar branches, efforts to foster a “culture of savings” in low-income neighborhoods may have very little impact. Additionally, bank closures in poor areas will most likely increase the use of predatory lenders (check-cashing centers, payday loan providers and pawnshops).
Thus, if regulators continue to be too timid to confront those banks violating the Community Reinvestment Act, if not in fact, then in spirit, access to mainstream credit will continue to be an uphill battle for poor families.
This post was coauthored by Melanie Jacobs.
In reviewing your article on the increasing trend by banks to close branches in low income communities, I thought it would be important to cease the opportunity to take the discussion a step further. The closure of bank branches in minority community is of great concern, however, it must also be noted that regulators are also hastening the closure of minority controlled financial institutions. Over the course of the last three years we have loss over 50% of minority controlled credit unions throughout our nation, and I'm sure we're also seeing the closure of many minority controlled banks. As an example, of 9 minority controlled credit unions that served the latino community in California, only three haven't been forced into liquidation or mergers during this period. It should be emphazied that these credit unions had an average age of 35 years, and were self sufficient relying almost exclusively on local collective wealth that was invested in the development of the communities they served. I'm sure you'll agree that minority communities will never experience meaningful economic development unless they have locally controlled institutions that retain local wealth that eventually can be leveraged to further economic development. Banks have tradtionally extracted wealth from these communities investing only minimal amounts in the development of these communities.
These credit unions represent the best of the American entreneurial spirit and the best avenue for low income communities to control their own development. Rather then seeking their desolution, the federal government should be proactively supporting their development especially when these instituitions have developed the capacity to eventually become sustainable. There is nothing wasteful about these institutions and they clearly represent the most prudent investment we can make as a society.
Thank you for taking this discussion to the next level. We too have been concerned about the closure of minority controlled financial institutions as well as community banks and financial institutions. Last year we focused on the closure of two Chicago based banks, Park National and ShoreBank, as examples of community banks with long histories of meeting community needs and helping minority communities build wealth.
In 2008, the largest banks in the country received up to $25 billion in taxpayer funds. According to CNN, these banks included Wells Fargo, Citigroup and JP Morgan Chase. Yet a year and a half after the Wall Street bailout, the value of smaller, community banks, the very banks that were addressing the needs of working families and underwriting community investment projects, didn’t seem to matter at all.
In 2009, the Federal Deposit Insurance Corporation (FDIC) took over Park National Bank, a staple in both Oak Park and Chicago’s Austin neighborhoods. Known as one of the most philanthropic banks in the Chicago area, Park National successfully offered banking services to low-income families and gave them an alternative to payday lenders, currency exchanges and subprime loans. Its accomplishments included bottomless funding for local nonprofits and social service agencies, underwriting costs for new schools, donations to community causes, rehabilitation of countless foreclosed homes that were sold back to residents at affordable rates, a lead role in neighborhood revitalization and economic growth, and countless small dollar loans to help fund local entrepreneurs. For 30 years, Park National Bank provided an infusion of projects, cash, jobs and morale to the community it served.
Due to losses in 2008 and 2009 associated with the subprime mortgage meltdown, regulators told Park National that it needed to raise capital. Although it was initially approved for Troubled Asset Relief Program (TARP) funding to help it recapitalize, it never received any money because no guidelines for TARP funding of small, privately held banks were ever created. Ironically, Park National was seized on the same day that U.S. Treasury Secretary Timothy Geithner presented Park National with $50 million in federal tax credits for its community development projects. More troubling, ShoreBank, America's first community development bank, was also allowed to fail.
It appears that large “too big to fail” banks which caused irreparable harm contributing to both the housing and economic crisis, should be bailed out, but the smaller, community banks which have been meeting the needs of low-income neighborhoods for decades should be allowed to fail. Yet, community banks are integral to the health and well being of our economy. Leaving large Wall Street banks as the only option for financial services, not only ignores the needs of the small business community, but puts consumers at risk.
Efforts to reform the Community Reinvestment Act (CRA) to reward community banks for their efforts while requiring big banks to do more have been slow. The Community Reinvestment Modernization Act of 2009, H.B. 1479, for example, would have done just this, did not pass. Similarly, although banking regulatory agencies held hearings across the country last year to determine what updates are needed in CRA regulations, no new recommendations have been issued yet. Thus, it is important for all consumers to keep raising these issues as you have just done.