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The Region Federal Reserve Bank of Minneapolis 2002 Annual Volume 17 Number 1 May 2003 The Region ISSN 1045-3369 Executive Editor: Arthur J. Rolnick Senior Editor: David Fettig Editor: Douglas Clement Managing Editor: Kathy Cobb Art Director: Phil Swenson Designers: Rick Cucci Mark Shafer The Region Federal Reserve Bank of Minneapolis P.0. Box 291 Minneapolis, MN 55480-0291 e-mail: paeditor@mpl.frb.org Web: minneapolisfed.org The views expressed in The Region are not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Articles may be reprinted if the source is credited and Public Affairs is provided with copies. Permission to photocopy is unrestricted. Hmong photography by Wing Young Huie Message from the President 3 Between Two Worlds: How Do Credit Markets Work? 4 Between Two Worlds: Photo Essay 16 Message from the First Vice President 33 Minneapolis Board of Directors 36 Helena Branch Board of Directors 37 Advisory Council on Small Business, Agriculture and Labor 38 Officers 39 Between Two Worlds How Do Credit Markets An investigation into credit availability in the Minneapolis-St. Paul Hmong community Federal Reserve Bank of Minneapolis This essay is based on a paper titled “Credit Availability in the M inneapolis-St Paul Hm ong C om m unity” by Maude Toussaint-Comeau and Robin Newberger of the Federal Reserve Bank of Chicago, and Jason Schmidt, A rthur J. Rolnick and Ron Feldman of the Federal Reserve Bank of M inneapolis. In addition to these colleagues, the authors thank Dick Todd of the Federal Reserve Bank of M inneapolis for valuable comm ents. T h e R e g io n The Region Message from the President It is probably safe to assume that most of the readers of this publication have a familial history of entre preneurship. Be it in retail, agriculture, light manu facturing or some type of service, many of us could tell stories of how our immigrant ancestors got start ed in the “new country.” These stories, of course, continue to play out today as new immigrants and refugees find their way into the U.S. economy. However, those stories are more than just family lore. The details within those entrepreneurial tales form the basis for an understanding of how busi nesses develop and grow. Such knowledge is impor tant if we hope to provide a business and financial environment that allows equal opportunity for all, and the United States has a number of laws and policies aimed at that goal. But those entrepreneur ial details are elusive—available data is usually afterthe-fact and offers little insight into choices made at startup—and without such data we cannot ade quately measure whether our programs are effective. For the Federal Reserve banks, this subject has particular currency because we, under the authority of the Community Reinvestment Act of 1977, must encourage commercial banks to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighbor hoods. Sounds pretty straightforward, but localized credit markets are complicated by a host of dynam ics, not least of which is the cultural and economic background of many of the residents. This is especially true of the neighborhoods of Minneapolis and St. Paul, where the Hmong have been settling for more than 25 years. These innercity neighborhoods were made even more diverse by the arrival of these Southeast Asian refugees, most of whom knew no English nor had any experience liv ing in a Western culture, let alone a market-based economy. How, then, would these people fare within the formal credit markets of the U.S. banking sys tem? Or, to focus the question the other way, how would banks respond to this new community within their neighborhoods? You’ll have to read the following essay for the answers, but one thing’s for sure, the research effort described in this year’s Annual Report has given us insight into more than just how much access the Hmong in Minneapolis-St. Paul have to bank credit, it has also provided a deeper understanding of how credit markets work. Some of those lessons go beyond the local neighborhoods described here and apply to other lending markets—that’s one of the benefits of this type of research. It’s not an end in itself, but the beginning of a broader understanding of credit markets. Finally, this year’s Annual Report includes a photo essay of the Minneapolis-St. Paul Hmong communi ty. The scenes depicted in these photos—education, entrepreneurship, family support and community involvement—reflect the key themes described in the written essay and provide a richer understanding of this ethnic community’s place in the Twin Cities. In other words, the photo essay helps to illustrate those stories that have formed the basis of our analytical research. I hope you enjoy reading this year’s Annual Report, and we welcome your comments. President a The Region Between Two Worlds How Do Credit M arkets Work? An investigation into credit availability in the Minneapolis-St. Paul Hmong community Meaningful program review can be achieved only communities can suffer when households and firms through measurement and critical analysis. Systematic cannot effectively access funding; when credit mar kets do not work well, standards of living can fall. Clearly then, the issues surrounding credit mar research of community economic development pro grams has been limited. Accordingly, your challenge is to vastly expand the information base. * Alan Greenspan kets are many, and they include questions about Chairman, Board of Governors neighborhood. For example, have lending groups formed within certain low- and moderate-income credit availability within certain subsets of a city or a Federal Reserve System communities? Do these groups form within certain When Congress passed the Community Reinvest minority groups? How do they operate? Have these groups formed because their constituents have been discouraged from seeking loans at banks? Are there gaps—real or perceived—between banks and those ethnic communities? These are important questions, and they are difficult to answer in broad terms. Reviewing results from CRA exams offers some insights, but such data are naturally limited. To gain a clearer understanding of the ability of households ment Act in 1977, it had a specific outcome in mind: to encourage depository institutions to help meet the credit needs of the local communities in which they operate, including low- and moderate-income neighborhoods. As one of the federal regulators authorized to implement the law, the Federal Reserve has a supervisory process in place to meas ure whether banks are meeting such credit needs. However, there is a broader goal implicit in the CRA and firms to access credit requires that we ascertain and explicit in Chairman Greenspan’s charge, and another source of data focusing on how they fund that is to broaden our understanding of how credit themselves. (For more on the CRA, see page 9.) markets operate. Why? Because the well-being of Thus, these issues are best examined at a micro level, From a speech titled “Community Economic Development” given at the Federal Reserve System’s Community Affairs Research Conference, Sustainable Community Development: What Works, What Doesn’t, and Why, Washington, D.C., March 28, 2003. 0 The Region Between Two Worlds within local communities, and through a research municate with the Hmong, along with a supportive community environment, is important to Hmong program designed to get at the answers. One such research program began in the mid- entrepreneurial success. 1990s when the Federal Reserve Bank of Chicago and the University of Chicago joined together to survey In particular, this essay will address four questions: the credit markets of two Chicago neighborhoods, one black and the other Hispanic. Among other find How available is startup financing for Hmong ings, these surveys revealed the importance of infor mal credit for businesses (for example, from family members, suppliers and so on) and showed that the What sources of credit are actually used? degree and type of informal lending varied between barriers in their attempts to obtain credit? the two neighborhoods. To advance this research, the Federal Reserve Bank of Minneapolis joined with the Are there unique characteristics about the Chicago Fed to survey the credit experience of a growing minority group in Minneapolis-St. Paul— ment that have affected the access to credit of small businesses in Minneapolis-St. Paul? Do Hmong entrepreneurs report substantial Hmong community or the local banking environ small business owners? the Hmong, who are refugees from Southeast Asia. Our answers are not definitive, inasmuch as there are limitations—discussed later—to this specific sur vey and the answers it provides. Such caveats, though, The survey of Minneapolis-St. Paul’s Hmong business community addressed the question of how a refugee group with cultural and economic disadvan are endemic to this type of research and only bolster tages would cope in a localized credit market. The Hmong, who until the 1950s had no written lan the call for more investigation. More generally, any survey is a snapshot of a particular community at a particular time; as such, it cannot possibly provide a clear picture from every possible angle. However, that does not prevent us from drawing important conclu sions. Taken together with the earlier work in Chicago, and with the addition of more research in the future, this snapshot will expand into a more guage, arrived in the United States with little or no understanding of English, let alone of Western busi ness and financial markets. How would these people fare in a society—and more specifically, in an econo my—that thrives on forms, business plans, acronyms, laws and regulations? Would Hmong entrepreneurs have access to credit from banks? In the end, the answer is that the Hmong entre complete picture of how credit markets work. preneurs have done surprisingly well, at least those Before addressing the above questions in greater who have opted to form businesses in Minneapolis- detail, we will first provide a description of the St. Paul, according to a survey of Hmong businesses Hmong in Minneapolis-St. Paul and of how the sur and a control group of business owners in the same vey was conducted. At the conclusion of this essay, we neighborhoods. The Hmong business owners are will consider avenues of further research and analysis. fairly new. However, it appears that Hmong business owners use bank financing as much as their neigh The Hmong experience bors did at startup. Also, it appears that an engaged The Hmong are immigrants from Laos and other banking community willing to reach out and com Southeast Asian countries who settled in the United E The Region ’pension & fyjti. CLOTHING & SHOES 383 U N IV .A V E .IB 651-287-0775 States as political refugees after the Vietnam War. use buildings surrounded by older housing stock. The 2000 decennial census data put the total Hmong population in the United States at roughly 169,000, The types of businesses located in these neighbor hoods range from small service-oriented businesses, making it one of the fastest growing Asian groups in the nation. Minnesota and Wisconsin have the largest concentrations of Hmong-Americans in the restaurants and retail to large industrial and manu facturing operations. From this description, at least some of the rea United States as a result of both direct settlement from Southeast Asia and resettlement. The latest enumeration shows 41,800 Hmong in Minnesota, roughly one-fourth of the nation’s total and almost sons the Federal Reserve Bank of Minneapolis chose to study the Hmong may be apparent. Research sug gests that immigrant groups, in general, lack capital and sufficient credit history to borrow from banks and financial institutions. Because the Hmong 2.5 times the 1990 total of 16,833. St. Paul, with a Hmong population of 24,389, remains the home of more than half of all Hmong in Minnesota. population’s roots are in an underdeveloped portion of Asia, they had limited experience with a well- Minneapolis has the next largest population, with 9,595 Hmong residents, followed by two northern suburbs of Minneapolis, Brooklyn Center with 1,346 and Brooklyn Park with 1,226. Indeed, the developed capitalist system. This fact, coupled with their relatively recent migration to the United States Minneapolis-St. Paul area boasts the largest Hmong credit from commercial banks and other formal community in the world outside Thailand. The Hmong have little tradition in formal busi ness ownership. Their historical economic experi financial institutions. Second, despite the obstacles, the Hmong commu nity located in Minneapolis-St. Paul has developed a ence consists primarily of subsistence farming. Once in the United States, many of the Hmong began agri culture-based businesses to capitalize on these tradi tional skills. As they increasingly congregated in urban areas, they naturally have shifted their busi ness focus. The largest concentrations of Hmong house holds and businesses are located in the Payne-Phalen and Thomas-Dale neighborhoods in St. Paul, where the bulk of the businesses reside, and along the Penn distinct, recognized and viable small business sector. This raises the question of how those businesses were financed and, in particular, makes it possible to study the access to, and usage of, formal credit by a reason ably large population of Hmong businesses. Third, the presence of immigrant/refugee small business sectors is an integral and growing aspect of the vitality of urban neighborhoods throughout the United States. The clustering of immigrant groups and their businesses within specific areas may Avenue North corridor in Minneapolis. These translate into greater economic activities in these as political refugees, suggests that the Hmong faced cultural and knowledge challenges in accessing neighborhoods are in the core cities and are charac neighborhoods. Moreover, self-employment has terized by well-established commercial strips com traditionally been an important channel for raising posed of aging commercial, industrial and mixed- the economic status of immigrant communities. Bates, Timothy M. 1996. Why Are Firms Owned by Asian Immigrants Lagging Behind Black-Owned Business? National Journal of Sociology 10.2 (Winter): 27-43. 0 The Region Between Two Worlds Diminished access to formal credit may reduce the optimal size of immigrant-owned businesses, increase in the study period (owners were surveyed from November 2000 through April 2001). their probability of failure, and delay or deter entry into self-employment by immigrant entrepreneurs. Of course, to measure something you need a stan As noted earlier, the survey for this project was based dard or benchmark to compare against; otherwise, it is difficult to draw conclusions from the data. Likewise, an important aspect of this research proj ect is that it included a control, or comparison, on a questionnaire developed by the University of group of non-Hmong business owners drawn from Chicago and the Federal Reserve Bank of Chicago. This original survey was edited to focus on questions the same ZIP codes as the Hmong establishments. Constructing the control on the basis of this geo pertaining to small business development and to graphic restriction ensured that the two samples had account for Hmong cultural differences. The survey was then translated to Hmong and reviewed by a Hmong Advisory Group (consisting of local Hmong access to the same financial institutions. This coin cides with the recurring geography-based phenome non of bank lending; that is, despite the Internet, business and community leaders) as well as the credit card companies and other opportunities to Hmong interpreters who conducted the survey. (The Wilder Research Center of St. Paul, Minn., a division obtain financing, many small firms rely on banks that are located within their business area. Specifically, we obtained a list of businesses whose Creating a survey and getting a sample of the Amherst H. Wilder Foundation, was retained to manage the implementation of the Hmong and ZIP codes matched those in the Hmong sample, ran domized it and purged it of any Hmong businesses control group surveys, including translation, sample selection and survey interviews.) Language barriers proved challenging; for exam ple, there are no Hmong words for “access” and “credit,” which form the very basis of the survey. Likewise, for those words and many others, a large number of Hmong words were needed to describe an English-language term; the word “bank,” for exam ple, required five Hmong words. Even in its abbrevi or known government and nonprofit organizations. Then 342 businesses from the randomized list were contacted, and 220 were found to be for-profit enter prises still in existence. Of these, 131 completed the survey (60 percent), 41 refused, and 48 could not complete the survey within the study period. Given our interest in studying the relative ability of Hmong small business owners to access credit from ated form, the survey took from three to four hours formal financial institutions, we further limited the to complete, compared to about two hours for the comparison group to 93 owners who identified them original Chicago survey. selves as “white” or “Caucasian,” in the belief that this group would have a highly developed level of access to An extensive effort was undertaken to compile a credit that would serve as a useful benchmark. listing of all known Hmong businesses in the greater Minneapolis-St. Paul area, most of which were locat ed along two primary commercial strips in St. Paul. Characteristics and caveats This process identified 170 Hmong businesses. Of A brief comparison of general descriptive statistics these, 121 (71 percent) completed surveys, 36 refused, and 13 could not complete the survey with on business and owner characteristics suggests two main findings. First, although the control group was H The Region selected solely on the basis of co-location with Hmong businesses, this group appears quite similar to the Hmong owners along several other dimen CRA: a brief introduction The Community Reinvestment Act is intended to encourage depository institutions to help meet the sions; for example, both groups are in the same types of business (mostly retail and personal services), credit needs of the communities in which they oper ate, including low- and moderate-income neighbor both depend on neighborhood income for prof itability, and both groups are comparably educated. hoods. It was enacted by Congress in 1977 and was revised in May 1995. Second, most of the noticeable differences Evaluation of CRA performance between the Hmong and control group owners would appear to disfavor access to credit for the The CRA requires that each depository institution's record in helping meet the credit needs of its entire Hmong. For example, Hmong businesses had con community be evaluated periodically. That record is siderably fewer years in operation than their white taken into account in considering an institution's counterparts. The longevity of the white businesses suggests that those businesses would have been the application for deposit facilities. ones that were the best capitalized at startup, since gives specific criteria for rating the performance of research has shown that business viability and longevity are associated with higher initial capital outlays. Hmong owners were roughly 10 years younger than their control counterparts. Greater depository institutions. Rather, the law indicates that Neither the CRA nor its implementing regulation the evaluation process should accommodate an insti tution's individual circumstances. Nor does the law require institutions to make high-risk loans that jeop business longevity also allows more time to establish ardize their safety. To the contrary, the law makes it relationships with banks and suppliers to support access to ongoing operating credit. To the extent that age is a proxy for credit history and creditworthiness, the substantially younger ages of the Hmong owners clear that an institution's CRA activities should be undertaken in a safe and sound manner. CRA examinations are conducted by the federal agencies that are responsible for supervising deposi tory institutions: the Federal Reserve System, the could be an indicator of greater potential risk to lenders, resulting in diminished access to credit. Nearly 70 percent of the Hmong businesses were started from scratch by the current owner, compared to only half of the control group. If commercial lenders are less likely to lend to new firms than to ongoing businesses, whose performance may not Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Interagency information about the CRA is available from the Federal Financial Institutions Examination Council. At the end of the CRA examination process, depos itory institutions receive one of the following ratings have been adequately documented over time, one of performance: Outstanding, Satisfactory, Needs to would reasonably expect the Hmong’s greater ten Improve or Substantial Noncompliance. dency to enter into new businesses to correspond with fewer startup and operational loans than the Source: The Fed's Board of Governors Web site, comparison group. www.federalreserve.gov/DCCA/CRA/. Before we proceed to a review of the survey results, it is important to recognize the limitations of E The Region Between Two Worlds Liberty State Bank, St. Paul University Bank, St. Paul Federal Reserve Bank of Minneapolis Walsh & Gaertner, St. Paul law firm Wells Fargo, St. Paul University Bank, St. Paul An engaged banking community willing to reach out and communicate with the Hmong, along with a supportive community, is important to Hmong entrepreneurial success.— Between Two Worlds, page 6 The Region this survey. First, the survey was originally designed For a closer look at the results, let us now address the to capture the use of informal lending sources and, four questions introduced at the beginning of this essay. likewise, may not provide a thorough examination about access to all credit. Following that, it is difficult How available is startup financing for Hmong to get accurate readings on whether credit applicants small businesses in Minneapolis-St. Paul? Overall, the Hmong businesses appeared quite were discouraged from applying for loans, and dis couragement is an important consideration when similar to the control group in terms of total startup funds, the sources of startup financing and the rela making assessments about credit access. Also, small sample sizes mean that results can be affected by tive shares provided by each source. One difference between the two groups involved the use of informal changes in the way answers are recorded. And final ly, the information in the following section that was gleaned from focus groups—which included a rela tively small number of participants—is, of course, funding sources. While both the white and Hmong owners made extensive use of such funds, Hmong owners utilized personal savings at higher rates and more qualitative than quantitative and should be considered accordingly; that said, such subjective levels than their white counterparts. Hmong owners who acquired preexisting busi responses can help illuminate the data. nesses reported marginally lower startup capital amounts than the white owners ($111,618 as Questions and answers: an overview of the survey results opposed to $134,172), but the survey responses indi cated virtually no differences in the amount of funds Once again, our primary interest in this research project was to determine whether Hmong small used for initial startups, with both groups using roughly $22,000 for such businesses. business owners had access to credit that was com parable to that of white business owners. Specifically, What sources of credit are actually used? from formal financial institutions at the same level as their white counterparts? To the extent that the Hmong owners systematically received equivalent credit to the control group, or encountered similar barriers and obstacles in their attempts to obtain credit, one could reasonably conclude that access to credit was comparable between the two groups. Of course, the fact that the Hmong owners used roughly the same amount of funds as white owners to commence their businesses does not necessarily imply that the Hmong had the same access to credit from formal financial institutions. To more fully address the question of access to credit, we next explored the var ious sources of startup capital that were employed, based on the following three broad categories: internal were Hmong business owners able to utilize credit We found that the Hmong owners utilized formal sources (any funds provided by the owner, including bank financing to the same extent as the control the use of personal credit cards and home equity group when the business was started and to the same loans); formal external sources (loans from formal extent, but at slightly lower rates, thereafter. With lenders and government programs); and informal respect to credit access as a self-identified problem, external sources (loans, gifts and investments from we did not find substantial differences between the relatives and other personal contacts). Hmong and white owners. A key finding is the sizable number of owners li The Region Between Two Worlds who were able to obtain external funding from a for While both groups reported little existence of mal source. Over 30 percent of both groups made use of such financing, with small business loans from bank-related financial barriers at startup, credit access appears to be an obstacle to the subsequent banks accounting for most of the responses in each growth of small businesses in general. This was par group. Of the Hmong owners, 25 percent reported that they received a loan from a bank (or other for mal lender), compared to 30 percent of the control. ticularly true for the Hmong businesses. However, this reflects the fact that their businesses had fewer years in operation. Hmong owners differed from the control group with respect to their utilization of personal savings. While the vast majority of both types of owner relied In summary, reported barriers to credit experi enced by Hmong business owners seem to be the same as those affecting white business owners; in on internal sources to finance their establishments, white owners were not as likely to directly invest their other words, the Hmong were no more likely to report discrimination in the credit market than were their white counterparts. savings into the business. Nearly 90 percent of the Hmong owners reported using personal savings dur ing the period of business formation, compared to less than 70 percent of the control group. The average share of total startup financing provided by internal sources also differed slightly between the two groups, accounting for nearly 60 percent of the typical Hmong owner’s startup funds vs. roughly 50 percent for the average white owner. Lastly, we searched for signs that owners were operating under financing constraints. Business owners were asked how they would utilize a $20,000 windfall. Nearly 75 percent of the Hmong owners stated that they would invest the funds in a new or existing business, compared to only 20 percent of the white control. This is consistent with the relative Do Hmong entrepreneurs report substantial barriers in their attempts to obtain credit? We searched for evidence of unequal access in a series of questions that were designed to allow owners to directly identify credit access as a problem or barrier. If the Hmong owners were systematically receiving newness of the Hmong businesses; the white owners, with longer-established businesses, would experience fewer financing constraints. A related question on risk tolerance revealed that close to 70 percent of the Hmong owners were somewhat or very willing to risk all of their possessions (including houses) in borrowing money to start another business, com pared to 35 percent of the white owners. less access to credit than their white counterparts, it Financial constraints can also be indicated by the would likely appear more frequently in their respons response of owners to bad times. Hmong- and es than in the control group. We found, though, that white-owned businesses that were in existence for at where a problem was identified, it was not unique to least three years and experienced a period of near Hmong businesses. failure were questioned about the strategies they used In cases when a loan was not sought, both groups to survive the downturn in business. While both reported similar reasons for not seeking a loan (for groups of owners were most likely to increase their example, a loan may have been unnecessary, the own work hours or reduce input expenses in reaction owner may have preferred not to use credit, or there to bad times, strategies involving credit use differed was a lack of knowledge about the credit process). markedly. Roughly 40 percent to 50 percent of the The Region HMONG funeral HOME white owners reported using a credit-related response—either borrowing more, obtaining suppli standing, willingness to educate and flexibility in lending programs. ers’ credit, increasing credit card balances or failing Cultural understanding. On the first point, the Hmong focus group said that the banking sector to pay debts—while only 6 percent to 11 percent of the Hmong owners cited such strategies. needed to be sufficiently knowledgeable about the Hmong society and its emphasis on relationships. For example, a Hmong grocery store owner who hap Are there unique characteristics about the pened to be located on a block with similar business es might appear to be a high-risk borrower, given the Hmong community or the local banking environment that have affected the access to credit of small business owners? level of competition the store faced. Such a concern, however, might be mitigated by the fact that each store The Hmong entrepreneurs seemed to reveal strong risk-taking dispositions, they have high education al attainment, they showed a willingness to invest primarily served a specific subset of the Hmong com munity’s clan structure, thus assuring profitability. large sums of money in their business, and they are open to leverage with their personal savings. These The bankers sounded a similar note: Establishing a personal relationship between the bank and the facts are likely to have contributed to providing positive signals as to the potential viability of the community was seen as paramount, the bankers maintained, given the high priority that is placed on Hmong businesses in the credit market, which may partially explain the Hmong success in accessing relationships within the Hmong society. Examples included conducting outreach programs, participat credit. But it is difficult to draw definitive conclu sions from these results. To augment the data col ing in community organizations and sponsoring neighborhood events and festivals. Education. Secondly, a willingness to educate Hmong borrowers and potential borrowers was lected from the survey and to further explore this question, we conducted interviews with two focus groups, one consisting of representatives of several banks in the area of St. Paul that was surveyed and a second consisting of Hmong community leaders. Focus group participants were also asked to respond to a summary of our preliminary analyses, as a check on the accuracy of the survey and the conclusions we drew from it. On that note, the Hmong focus group generally agreed with the sur borrowers because they lacked technical documents (business plans, cash-flow analyses and so on), loan officers needed to explain what documentation was required and assist the business owners in producing vey’s findings concerning access to credit, namely, it, or redirect them to an organization that could per that qualified Hmong business owners were likely form these tasks. viewed as very important by the Hmong focus group. Bankers needed to be willing to educate busi ness owners on how to comply with loan policies. Rather than simply denying requests from potential to have adequate access to bank financing. In On this point, the bankers spoke with a clear view: response to the question about the financial envi An effective way to educate the Hmong about the ronment, independently, both focus groups financial process was to hire Hmong employees. described similar themes that were necessary to Hiring Hmong personnel was a critical component to ensure proper access to credit: cultural under a successful Hmong lending program, both in terms 13 The Region Between Two Worlds of being able to relate to applicants and helping to edu cate them on issues such as saving, applying for a loan and documenting business performance. Flexibility. Several Hmong participants also stressed the importance of flexibility and the willing ness of banks to deviate from traditional loan analy sis procedures where appropriate, such as using alter native sources to vouch for the creditworthiness of a potential borrower. Here again, a crucial factor under such arrangements was the employment of Hmong most Hmong entrepreneurs would go for financial assistance. Participants also acknowledged that many in the Hmong community have a tendency to rely on personal savings to start their businesses. In their opinion, the frequent use of personal savings stems from a preference toward using one’s own and fami ly savings. However, they did not rule out potential limited access to financial institutions. Again, this potential limited access could be minimized through educational efforts. loan officers and/or loan analysts, since these individ uals could advocate for loans on the basis of the char Measuring results to maximize output: acter of the borrowers and their relationships within the Hmong community, consistent with safe banking the need for more research practices. Flexibility was also a major theme of the banking focus group. For example, the bank might consider measuring the income of the business owner’s entire family, as opposed to using the direct earnings of only the owner, for calculating loan-to-income ratios. Lending to Hmong-owned businesses was viewed Some researchers focus on the bank as the unit of analysis; that is, they view bank lending data and draw inferences about whether local communities were adequately served by analyzing such data. With the work in Chicago and, especially, with this latest study in Minneapolis-St. Paul that includes a com parison group, we can begin to view these credit mar quite favorably by all of the banking focus group par ticipants. Specific mention was made of the entrepre neurial disposition of the Hmong, their detailed knowledge of running successful businesses, their abil ity to leverage resources from multiple sources and the willingness of Hmong borrowers to repay loans. Finally, although Hmong representatives felt that banks were successful in meeting the community’s kets from the “inside out” and gain deeper insight into the financial well-being of a community. However, this is only the beginning of such research efforts. In the coming years the Minneapolis Fed, in partnership with other Federal Reserve banks, plans to extend this research to communities in cities throughout the country and to revisit neigh borhoods that have been previously surveyed. Questions persist; for example, while the Hmong credit needs, they indicated that more could be done credit survey answered important questions about to improve overall access to credit. While few partic access to credit for a particular minority group, it ipants believed that Hmong individuals were subject raises other issues. How do other ethnic groups to systematic discrimination from the banking sector, manage in Minneapolis-St. Paul? How will the same the general consensus was that many business owners Hmong community fare in five or 10 years, and what felt that bank loan requests would be rejected because can we learn from their presumed growing assimila of limited credit histories and the inability to produce tion? How do such credit markets operate in other required documentation—factors that could be mit cities? Have the Hmong had a similar experience in igated by more education. Opinions were that family other areas where they have settled? Are there com loan funds or lines of credit were the first place that mon lessons or business practices or, conversely, do The Region certain communities have more successful credit mar The overarching objective of community economic kets than others— if so, why? Can we transfer success ful techniques—from both the lending side and the consumer side—from one city or neighborhood to the next? development and empowerment is to help underserved populations accumulate assets and improve their eco nomic well-being. Measuring the results of programs dedicated to such goals is essential to maximizing the impact of these programs and managing scarce resources. Meeting the goals, particularly in areas and And so we conclude this essay where we began, with an excerpt from a speech by Federal Reserve Chairman Alan Greenspan, who was addressing the among populations where biases and negative percep tions may have contributed to market failures, helps Federal Reserve’s third research conference devoted to community affairs in March 2003, and where people improve their financial standing, regardless of their current economic status. Q these survey results were presented. That these con ferences are held attests to the importance of the sub ject, and that there have been only three such confer ences suggests that more work is in order. Where to find more on the Web For the complete research paper on the Hmong small business survey, including data, visit the Minneapolis Fed's Web site at minneapolisfed.org/research and click on Special Studies. From there you can link to other research on this subject, including the Minneapolis Fed's Community Affairs site and the previous work by the Federal Reserve Bank of Chicago on Hispanic and black neighborhoods in Chicago. Where to find more photos on the Web At the Web address listed above, click on Between Two Worlds: Photo Essay. 15 a a a e i .m m jfcvw w * vytfvwv* w w w xw w . o goo 3 g i L -J . *44m*.¥ *** A 4 'JL *mJr in r r ; Between Two Worlds A Photo Essay by Wing Young Huie .,"VV* . The Hm ong, who until the 1950s had no written language, arrived in the United States with little or no understanding of English, let alone of Western business and financial markets. How would these people fare in a society— and more specifically, in an economy— that thrives on forms, business plans, acronyms, laws and regulations? Would Hm ong entrepreneurs have access to credit from banks? — Between Two Worlds, page 6 A w illingness to educate H m ong borrow ers and potential borrow ers was viewed as very im p o rta n t by the H m ong focus group. Bankers needed to be willing to educate business owners on how to com ply w ith loan policies -Between Two Worlds, page 13 ggak. v ^ |bK\ •3 L :* y ^ ■ t Jr ^ rv » - J| fAftMtftf MAIUtfT tmmm wiicommm m o o r ** chicks XIGNO i mm fh n p 1 qc u - .. ™ 1* 0 ^ '* r F ^ T is S S f f W 'Winr-"T ■m\| ^ i ■** *« 4 i j ,... „ ’' V A l i i C l I V 1i l 1 IS W 1 saw 4 w Establishing a personal relationship between the bank and the community was seen as paramount, the bankers maintained, given the high priority that is placed on relationships within the Hmong society. -Between Two Worlds, page 13 In the end, the answer is that the Hmong entrepreneurs have done surprisingly well, at least those who have opted to form businesses in Minneapolis-St. Paul. The Hmong business owners are fairly new. However, it appears that Hmong business owners use bank financing as much as their neighbors did at startup. — Between Two Worlds, page 6 11#!!$- m m i v y ^ t \ \ / W g J&L;A :_jj M l w fjgi! rr 1§v Hfiw ■ j‘ »lw. ™p JPUHHk ■ »4 ■*•* The Region Federal Reserve Bank o f M inneapolis The Region Message from the First Vice President The Federal Reserve faced significant challenges in all of its primary areas of responsibility—monetary pol icy, banking supervision and regulation, and financial services—in 2002. Some of these challenges tend to be cyclical in nature. Others—most notably a general decline in check volume and the resulting need for a wholesale change in our check processing infrastruc ture—place us in untested waters. Like any business dealing with uncertainty and rapid change, we must respond both quickly and carefully. Rigorous analysis and operational excellence in pursuit of our goals are crucial in light of the Federal Reserve’s responsibilities implementation in 2003, will allow us to better and the public trust placed in us. serve our customers and respond to changes in the The Bank’s 2002 accomplishments demonstrate how marketplace for payment services. The national we put these standards into practice on a daily basis. Check Standardization project team, led by Minneapolis staff, continued to successfully man • The Bank met its 2002 local net revenue targets for Check and for priced services overall. age the project during 2002. These results are noteworthy given the increase in our • The Bank was selected in 2002 as a Customer targets from 2001 and the decline in check vol Contact Center, one of only two sites across the umes. More generally, the Bank met its budget Federal Reserve System that provide customer objectives across all operations. Achieving these support to financial institutions electronically results required all business areas to carefully accessing our financial services. We were awarded manage expenses throughout the year. this responsibility, in part, due to our established record of excellent customer service and System • As a result of extensive preparations in 2002, the leadership. Bank is now prepared to convert to the new stan dard check processing environment, a major • We restructured the operations of our Helena undertaking given the volume of checks we Branch, consolidating certain support areas with process. This new system, set for full nationwide the main office in Minneapolis, to realize greater [V The Region 2002 by the Numbers In 2002, the Federal Reserve Bank of Minneapolis processed: • 6.1 billion ACH (Automated Clearing House) payments worth approximately $15.9 trillion. ACH is a nationwide system, built and operated by Minneapolis staff, that provides the electronic exchange of debits and credits. • 1.0 billion checks worth approximately $853 billion. The Minneapolis office is one of the largest check processing centers in the Federal Reserve System. • $10.6 billion of excess currency received from financial institutions, destroyed $1.4 billion of unfit currency and shipped $11.5 billion of fit and new currency. • 1.3 million savings bond purchase requests and 156,725 savings bonds servicing transactions, and answered 285,978 savings bonds customer service calls, as one of five savings bonds processing centers in the Federal Reserve System. • Forms, tenders, account maintenance and other customer transactions for 524,000 active TreasuryDirect accounts for individuals holding Treasury securities totaling $67.5 billion, as one of three TreasuryDirect processing sites nationwide. • Transaction items worth more than $250 billion through FR-ETA (Electronic Tax Application), a same-day payment mechanism, hosted by the Minneapolis Fed, for businesses paying federal taxes via their financial institutions. The Region efficiencies. These changes will allow us to In 2003, this Bank will assume the leadership of respond more effectively to the increasing cost the Federal Reserve System’s Financial Services pressures on our financial services businesses. To Policy Committee. Minneapolis Fed President Gary remain competitive in the marketplace, we will Stern becomes chairman of this Systemwide group, strive to continue to improve productivity across which is responsible for oversight of the Federal all of our operations. Reserve Banks’ participation in the U.S. payments system. This role offers us an opportunity to con • In our supervision of Ninth District financial tinue the Minneapolis Fed’s tradition of rigorous institutions, we responded effectively to the chal analysis and execution on a wide array of critical lenge of weakening banking conditions. We also issues in the future. continued our efforts to incorporate market infor mation into the supervisory assessment of finan cial institutions’ risk management processes. • During 2002, the Bank pursued a number of research projects. In the housing arena, we explored the so-called affordability crisis and James M. Lyon questioned the efficacy of policies that seek to First Vice President increase homeownership through small reduc tions in mortgage rates. In the economic devel opment arena, we explored how Hmong business owners in our district’s largest metropolitan area finance their activities and whether they have adequate access to financial institutions. The results of this work are summarized in this year’s Annual Report essay. The year 2002 presented a number of difficult challenges, and the outlook for 2003 is no less daunt ing. Having met the challenges of 2002 successfully, we will not rest on past accomplishments. Rather, we will strive to continue to improve the quality and cost efficiency of our operations. 35 The Region Minneapolis Board of Directors Ronald N. Zwieg Linda Hall Whitman Chairman Deputy Chairman CLASS A ELECTED BY MEMBER BANKS CLASS B ELECTED BY MEMBER BANKS CLASS C APPOINTED BY THE BOARD OF GOVERNORS Roger N. Berglund D. Greg Heineman Linda Hall Whitman President and Chief Executive Officer Dakota Western Bank Bowman, N.D. Chairman Williams Insurance Agency Inc. Sioux Falls, S.D. Chief Executive Officer QuickMedx Minneapolis, Minn. Kay G. Clevidence Jay F. Hoeschler Frank L. Sims President Farmers State Bank Victor, Mont. President Hoeschler Realty Corp. La Crosse, Wis. Corporate Vice President, Transportation Cargill Inc. Minnetonka, Minn. Dan M. Fisher Rob L. Wheeler Chief Information Officer Community First Bankshares Inc. Fargo, N.D. Vice President and Sales Manager Wheeler Manufacturing Co., Inc. Lemmon, S.D. 36 Ronald N. Zwieg President United Food and Commercial Workers Local 653 Plymouth, Minn. The Region Helena Branch Board of Directors William P, Underriner Thomas O. Markle Chairman Vice Chairman APPOINTED BY THE BOARD OF GOVERNORS APPOINTED BY THE MINNEAPOLIS BOARD OF DIRECTORS Thomas O. Markle President and Chief Executive Officer Markle’s Inc. Glasgow, Mont. William P. Underriner President Underriner Motors Billings, Mont. Emil W. Erhardt Chairman, President and Chief Executive Officer Citizens State Bank Hamilton, Mont. Richard E. Hart President Mountain West Bank of Kalispell Kalispell, Mont. Marilyn F. Wessel Dean and Director Museum of the Rockies Bozeman, Mont. Seated (from left): William Underriner, Richard Hart; standing (from left): Thomas Markle, Emil Erhardt, Marilyn Wessel FEDERAL ADVISORY COUNCIL MEMBER R. Scott Jones President and Chief Executive Officer Signal Financial Corp. Mendota Heights, Minn. 37 The Region Advisory Council on Small Business, Agriculture and Labor Rob L, Wheeler, Chairman Vice President and Sales Manager Wheeler Manufacturing Co. Inc. Lemmon, S.D. Karla Aaland Steve Hunter Curt Niemala President Loegering Manufacturing Casselton, N.D. Secretary-Treasurer Minnesota AFL-CIO St. Paul, Minn. Secretary Treasurer Blizzard Corp. Calumet, Mich. Terry Anderson George Kronschnabel Joe Rothschiller President Anderson Chemical Co. Litchfield, Minn. President Great Lakes Plastics Corp. Hancock, Mich. General Manager Steffes Corp. Dickinson, N.D. Gary Heine Karl Murch Gae Veit Agricultural Agent Yankton, S.D. Controller Nortrax Equipment Co. Eau Claire, Whs. Chief Executive Officer Shingobee Builders Loretto, Minn. Carrie Holmen Rancher Billings, Mont. Seated (from left): Terry Anderson, Carrie Holmen, Curt Niemala, Gary Heine; standing (from left): George Kronschnabel, Karla Aaland, Steve Hunter, Gae Veit, Rob Wheeler The Region Federal Reserve Bank of Minneapolis Senior Management Gary H. Stern Sheldon L. Azine Arthur J. Rolnick President Senior Vice President and General Counsel Treasury Services, Cash Services, Administrative Services and Law Senior Vice President and Director of Research Research and Public Affairs James M. Lyon First Vice President Chief Operating Officer Claudia S. Swendseid Scott H. Dake Senior Vice President Check Standardization Project Office Senior Vice President Priced Services, FedACH Support Services, Customer Contact Center and the Helena Branch Creighton R. Fricek Senior Vice President and Corporate Secretary Information Technology, Human Resources and Financial Management Niel D. Willardson Senior Vice President Banking Supervision, Risk Management and Community Affairs Seated (from left): Claudia Swendseid, Gary Stern, James Lyon, Niel Willardson, standing (from left): Scott Dake, Arthur Rolnick, Creighton Fricek, Sheldon Azine 39 The Region Federal Reserve Bank of Minneapolis Officers Duane A. Carter Vice President Cash Services David Fettig Vice President Public Affairs Michael Garrett Vice President Human Resources Linda M. Gilligan General Auditor Audit Caryl W. Hayward Vice President Check Services and Customer Relations Susan K. Rossbach Vice President and Deputy General Counsel Law Richard M. Todd Vice President Risk Management and Community Affairs Thomas H. Turner Vice President Treasury Services Cheryl L. Venable Vice President FedACH Support Services Warren E. Weber Senior Research Officer Research Matthew D. Larson Vice President Information Technology Ron J. Feldman Assistant Vice President Banking and Policy Studies Jean C. Garrick Assistant Vice President Check Services and Customer Relations Peter J. Gavin Assistant Vice President FedACH Support Services Elizabeth W. Kittelson Assistant Vice President Financial Management Samuel H. Gane Vice President and Branch Manager R. Paul Drake Assistant Vice President Check and Support Susan M. Woodrow Assistant Vice President Cash and Support For the complete 2002 Financial Barbara J. Pfeffer Assistant Vice President Treasury Services Richard W. Puttin Assistant Vice President Check Services Susan J. Manchester Vice President Treasury Services Kelly A. Bernard Assistant Vice President Check Standardization Project Office Paul D. Rimmereid Assistant Vice President Financial Management Preston J. Miller Vice President Banking and Policy Studies Jacquelyn K. Brunmeier Assistant Vice President Banking Supervision Randy L. St. Aubin Assistant General Auditor Audit Kinney G. Misterek Vice President Banking Supervision James A. Colwell Assistant Vice President Banking Supervision Kenneth C. Theisen Assistant Vice President Check Services Marie R. Munson Vice President Customer Contact Center Barbara G. Coyle Assistant Vice President Risk Management H. Fay Peters Vice President Administrative Services James T. Deusterhoff Assistant Vice President and Discount Officer Risk Management John E. Yanish Assistant Vice President and Assistant General Counsel Law F ie le n a B r a n c h Statements of the Federal Reserve Bank of Minneapolis go to minneapolisfed.org/ region/03-05 The Federal Reserve Bank of Minneapolis thanks the Hmong community for its cooperation with this work. Wing Young Huie is an award-winning photographer who has exhibited locally and nationally. In 2000 the Minneapolis StarTribune named him Artist of the Year. His photographs are in the permanent collections of the Walker Art Center, the Minneapolis Institute of Arts, the Minnesota Historical Society and the Museum of Fine Arts, Houston. Mark Shafer, Minneapolis Fed, designed this annual report issue of The Region. Auditor Independence The firm engaged by the Board of Governors for the audits of the individual and combined financial statements of the Reserve Banks for 2002 was PricewaterhouseCoopers LLP (PwC). Fees for these services totaled $1.0 million. In order to ensure auditor independence, the Board of Governors requires that PwC be independent in all matters relating to the audit. Specifically, PwC may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2002, the Bank did not engage PwC for advisory services. For more information on the Minneapolis Fed and the Federal Reserve System, go to minneapolisfed.org. Useful telephone numbers (612 area code unless otherwise indicated): For the Public For Financial Institutions Consumer Affairs Help Line: 204-6500 Cash Services Help Line: 204-5227 Job Hot Line: 204-5366 or 1-877-766-8533 FedACH Help Desk: 204-5400 Media Inquiries: 204-5261 Customer Relations Department: Research Library: 204-5509 204-7010 or 1-888-333-7010 Treasury Auction Results, Current Offerings, Bills, Notes, Bonds: 1-800-722-2678 Public Affairs Federal Reserve Bank o f M inneapolis P.O. Box 291 M inneapolis, M innesota 55480-0291 Return Service Requested **********************^yyQ 5- D I G I T RESEARCH LIBR A R Y FEDERAL RESERVE BANK OF ST L O U IS PO BOX 442 SA IN T L O U IS , MO 63166-0442 631.66
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