Twenty-five years ago, in the throws of the previous big banking crisis, Congress passed The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). One of the goals of this legislation was the preservation and encouragement of minority ownership in the nation’s banks. It was believed, and history has shown, that these Minority Depository Institutions (MDIs) can play an important role in under-served communities.
What is a MDI?
FIRREA defined “minority depository institution” as any depository institution where at least 51% of the stock is owned by one or more socially and economically disadvantaged individuals. The FDIC then changed the phrase “socially and economically disadvantaged” to “minority”. Minority was defined as: Black American, Asian American (includes Pacific Islanders), Hispanic American or Native American (includes Alaskan). American is an essential part of the definition as the stock must be held by U.S. citizens or permanent legal residents to be considered minority. Socially and economically disadvantaged was removed from the equation.
Why is it Important?
MDIs often play a large role in promoting the local economies of neighborhoods that would otherwise have no access to a bank branch. A designation of MDI can be a big benefit to the institution. MDIs are provided with education and training, and are afforded technical assistance to prevent insolvency. Failures are rare because the FDIC wants to preserve the number of MDIs. In the event that one does fail, the acquiring institution ideally qualifies for the same MDI designation.
Then there are the burdens associated with being the primary source of a community’s economic viability. While 73% of the nation’s banks are recommended by Bauer, the percentage drops considerably when looking at the subsets of MDIs. Whether the MDI is actually in a socially and economically disadvantaged neighborhood, or if it is merely a reflection of the melting pot that it calls home, makes no difference when it comes to its rating from BauerFinancial. Bauer uses the same stringent guidelines to rate ALL banks independently and fairly.
Here are some areas in which the MDIs seem to buck the industry trends:
Profitability: Return on Average Assets (ROA) for the industry is at 1.08%. (A healthy profit is generally considered to be 1% or better.) Only one subset of MDIs (Asian) reached that level.
Loans to Deposits: Higher LTD ratios may indicate MDI banks are better at lending to their customers in need.
Asset Quality: Nonperforming assets (delinquencies + repossessions) are higher than industry averages in all MDI subsets except Native American.
Service Fees: Average service fees per transactional deposit dollar vary considerably from one group to another. The Asian subset is the only one that does not exceed the industry average.