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AIL-4

NEWS RELEASE
FOR RELEASE AT 6 :0 0 P.M.
FRIDAY, OCTOBER
1976

PR -83-76 (1 0 -1 -7 6 )

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LOAN LOSSES IMPEDE PROFITABILITY AT MINORITY BANKS ,

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In a Speech to the N ational Bankers A sso cia tio n , Chairman Robert E. B arnett of The
Federal Deposit Insurance Corporation pointed to the extrem ely high loan lo sse s
which m inority banks continue to experience as the most s ig n if ic a n t f a c to r preventing
them from achieving a s a t i s f a c t o r y le v e l of p r o f i t a b i l i t y .
The number of minority-owned banks has increased from ten in 1963 to about 85 today.
These include banks organized by b la ck s, Mexican-Americans, oth ers of Hispanic
descent, American Indians and Americans of O rien tal a n ce stry .
The m inority banks a re s ig n if ic a n tly le s s p ro fita b le than nonminority banks and, in
f a c t, as a group, l o s t money in 1975. While operating expenses pf the m inority banks
seem to be somewhat higher than the average bank, the s ig n if ic a n t area of d ifferen ce
is the very high lo sse s on loans experienced by the m inority banks. M inority banks
had lo sse s equal to 1 .2 p ercent of th e ir t o t a l loans in 1975, while the average bank
of comparable siz e had lo sse s of .3 p e rce n t,
E a rlie r FDIC stu d ies had in d icated th a t the m inority banks' performance was g ettin g
clo ser to the average as they matured. That trend seems to be continuing except fo r
the problem of loan lo s s e s .
The loan lo sse s are probably due in g re a t p a rt to economic conditions in the commu­
n itie s in which m inority banks operate and to thp m inority banks’ o b je ctiv e of
serving as a source of financing to minority-owned businesses and other small busi­
nesses and consumers in areas of high m inority population.
Mr. Barnett stre sse d the need fo r m inority banks to show a p r o f it i f they a re to
become v ia b le long-run sup pliers of banking se rv ice s to th e ir community. He urged
a more o b je ctiv e loan p o lic y , i f n ecessary to reduce loan lo sse s and achieve
p r o f ita b ility .

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FEDERAL DEPOSIT INSURANCE CORPORATION, 5 5 0 Seventeenth St. N.W., Washington, D.C. 20429




202-389-4221

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C U R R E N T P E R F O R M A N C E O F M INORITY BANKS

The rap id i n c r e a s e in r e c e n t y e a r s in the n u m b er of banks owned by
b lack A m e ric a n s and m e m b e rs of o th e r m in o rity grou p s probably h as m ad e
y o u r 's th e m o s t c lo s e ly w atch ed and m o s t in te n se ly an aly zed group of new
banks in the n a tio n 's h is to r y .

T h is is p robably a s it should b e.

On the

one hand, th is scru tin y h a s provid ed in fo rm a tio n w hich h as helped in the
developm ent of p ro g ra m s su ch a s th e G overn m en t m in o rity bank d ep o sit
p ro g ra m , the A m e ric a n B a n k e rs A s s o c ia tio n M inbank, and in the p ro g ra m s
of so m e p riv a te c o r p o r a tio n s to ch an n el d e p o sits to y o u r in stitu tio n s .

At

the sa m e tim e , th e r e s u lts of r e s e a r c h into y o u r p e rfo rm a n c e h av e p r o ­
vided u sefu l in fo rm a tio n on th e e x p e rie n c e of th e banks c h a r te r e d soon a f te r
the new m o v e m e n t b egan in 1 9 6 3 .

T his know ledge should be of b en efit to

the y o u n g er m e m b e rs of y o u r group in piloting th e ir own in stitu tio n s through
th o se d ifficu lt f i r s t y e a r s of o p e ra tio n .
W h atev er the re a s o n s f o r th e e x is te n c e of only 10 m in o rity -o w n e d banks
in 1 9 6 3 , the s ix -fo ld i n c r e a s e in y o u r m e m b e rs h ip s in c e th a t tim e in co n ju n c­
tion with a g r e a t i n c r e a s e in the ro le of m in o ritie s a s o f f ic e r s and d i r e c t o r s
of n o n m in o rity b an k s, is a c l e a r in d ica tio n of the opening-up of op p o rtu n ities
in the fin a n cia l s e c t o r .

J u s t a s im p o rta n t, th is exp an sion is a trib u te to y o u r

own a b ility to s e iz e th o se o p p o rtu n ities o n ce th e in itia l b a r r i e r s w e re r e ­
m oved.
In f a c t , it is no lo n g e r p o ssib le to k eep a c c u r a t e t r a c k of m in o rity ban ks.
W hereas 20 o r even 15 y e a r s ago we could speak of the 10 b la ck banks and
the 1 4 ,0 0 0 w hite b an k s, the p re s e n t s tr u c tu r e is m u ch m o re co m p le x .




We

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now h av e m any m o r e b la ck b an k s, w e h av e a n u m b er of banks with heavy
in v o lv em en t o r c o n tro l by M e x ic a n -A m e r ic a n s , by o th e rs of H isp an ic d e ­
s c e n t, and by A m e r ic a n Indians a s w ell a s so m e banks m an ag ed by Chines eA m e r ic a n s o r J a p a n e s e -A m e r ic a n s , so m e of w hich a r e owned by la r g e
in te rn a tio n a l b an k s.

In addition, m any m o re banks a r e m u ltir a c ia l in the

m akeup of th e ir m a n a g e m e n t, d i r e c t o r s , and s to c k h o ld e rs .

In so m e c a s e s ,

this c o n s is ts of sig n ifica n t w hite in v olvem en t in p red o m in an tly m in o rity
ban ks.

In o th e rs it c o n s is ts of sig n ifica n t m in o rity in v o lv em en t in non­

m in o rity b an k s.

Som e of th is s ta r te d out a s token re p re s e n ta tio n , of co u rse,

and so m e re m a in s ju s t th a t.

So be it.

B ut th e r e a r e m an y c a s e s in which

the in v o lv em en t of e a ch group with the o th e r h as grow n sig n ifica n tly .

Finally,

in s e v e r a l c a s e s , m in o rity grou p s h av e p u rch a se d c o n tro l of an existin g non­
m in o rity bank.

I view th is fuzzing of the d istin ctio n betw een m in o rity banks

and o th e rs a s a v e ry h ealth y d evelopm ent even though it has the side effect
of m aking m o r e d ifficu lt the s t a t i s t i c a l c o m p a ris o n s of m in o rity and non­
m in o rity b an k s.

If I w e re fo rc e d to s ta te the n u m b er of banks owned by

people who a r e r a c i a l l y in the m in o rity , h o w e v e r, I would sa y th a t th e re
a r e about 85 su ch b an k s.
As th is grow th in the p a rticip a tio n of m in o ritie s in the ow nership of
fin a n cia l in stitu tio n s h as p ro ce e d e d , th e r e h as b een a continuing effo rt at
the FD IC to m a in ta in u p -to -d a te in fo rm a tio n on th e o p e ra tio n of y o u r banks
and to m e a s u r e the s u c c e s s of m any of th o se o p e ra tio n s.

The FD IC has

cond ucted s e v e r a l stu d ies of m in o rity ban ks, and h as p rovided fin a n cial and
d ata p ro c e s s in g su p p ort of o th e r stu d ies con d ucted by N ational B an k ers



A s s o c ia tio n sta ff and by a c a d e m ic r e s e a r c h e r s .

Il is a p p ro p ria te a t this

tim e , when to ta l a s s e t s in a ll m in o rity -o w n e d in stitu tio n s now e x ce e d a
billion d o lla r s , to re e x a m in e y o u r p r o g r e s s and to re e v a lu a te y o u r o p e r a ­
tio n s.

T his ev alu atio n m u st c o n s id e r not only g e n e ra l banking g o als of

s e r v ic e to the co m m u n ity , grow th, and p ro fita b ility but a ls o the s p e c ia l
g o als w hich you h av e often enunciated f o r y o u r s e lv e s .

T h e s e , a c c o rd in g to

d ifferen t sp o k esm en of the m o v e m e n t, inclu de the financing of m in o rity
b u sin e ss e n te r p r is e , providing em ploym en t opportunity and e x p e rie n c e in
banking to the m in o rity co m m u n ity , providing banking s o u r c e s to e co n o m ica lly
d ep riv ed a r e a s , and stim u latin g ethnic p rid e am ong m in o r itie s .
The f i r s t study attem p tin g to c o m p a re the o p e ra tio n s of m in o rity and
n o n m in ority banks w as done by A ndrew B r im m e r when he w as on the B o a rd
of G o v e rn o rs of the F e d e r a l R e s e r v e S y ste m .

The m in o rity banks c a m e out

v e ry p o o rly in th at c o m p a ris o n and the co n clu sio n s B r i m m e r d rew f ro m his
study w e re e x tr e m e ly n e g a tiv e and p e s s im is tic as to fu tu re p ro s p e c ts fo r
m in o rity ban ks.

A n o th er a n a ly sis w as done soon a fte rw a rd s by Ed Iro n s

when he w as E x e c u tiv e D ir e c to r of th is o rg a n iz a tio n .

He showed th at a g r e a t

deal of the n e g a tiv e r e s u lts of the B r i m m e r study w e re due to the f a c t that
the m in o rity banks w e re m uch s m a l l e r on a v e r a g e than the n o n m in ority banks
and, of m u ch m o r e im p o rta n c e , a g r e a t m any of the m in o rity banks in the
B r im m e r study w e re re c e n tly e sta b lish e d in s titu tio n s .

A s we a ll know, it

tak es a few y e a r s f o r a new bank to b e co m e e sta b lish e d and p ro fita b le .
L a te r r e s e a r c h h as shown th a t it ta k e s lo n g e r, on the a v e r a g e , fo r m in o rity




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banks to b e co m e p ro fita b le than f o r co m p a ra b ly siz e d n o n m in o rity ban ks.
When th o se f a c t o r s w e re c o r r e c t e d f o r , the m in o rity banks s till did not look
as good in t e r m s of sta n d a rd p e rfo rm a n c e r a tio s a s th e n o n m in o rity banks,
but the d iffe re n c e s w e re not a s g r e a t.
S e v e ra l fu r th e r stu d ies h ave been done at the FD IC along th is sa m e vein,
but with in c r e a s in g so p h istica tio n in t e r m s of m aking s u r e th at co m p a ra b le
grou ps of banks w e re being co m p a re d , and in attem p tin g to pin down ju st
w h ere the d isad v an tag e of the m in o rity banks la y .

A study in 1 973 by John

B o o rm a n of the FD IC staff co n firm e d th a t, even a f te r m aking a ll ap p ro p riate
a llo w a n ce s f o r d iffe re n ce s in s iz e , a g e , and lo ca tio n , b lack banks w e re less
p ro fita b le than co m p a ra b le n o n m in o rity b an k s.

W hile th is w as not su rp risin g,

h is r e s e a r c h led to two findings with im p o rta n t im p lic a tio n s :

F i r s t , the

d iffe re n ce in p ro fita b ility b etw een th e two grou ps of banks w as la rg e ly
acco u n ted f o r by loan l o s s e s .

Second, the gap b etw een b la ck and w hite

banks se e m e d to be n a rro w in g o v e r tim e .

A s a r e s u lt of a n a ly sis of th ese

f a c t o r s , B o o rm a n c a m e to so m e co n clu sio n s about the p r o s p e c ts and ap p ro ­
p r ia te r o le of m in o rity b an k s:




n[M ]in o rity -o w n ed banks ca n su c ce e d in g e n e ra tin g
o p eratin g in co m e . . . only when they m an ag e to
co n tro l loan l o s s e s . T his in tu rn su g g e sts th at fu r th e r
re tre n c h m e n t in lo c a l lending o p e ra tio n s m a y be
n e c e s s a r y if th e se banks a r e to su rv iv e . But this
p ro p o sa l in v o lv es a c o n tra d ictio n . On the one hand,
c o m m e r c ia l banks h av e tra d itio n a lly b een e sta b lish e d
to s e r v i c e the loan dem and of s m a ll lo c a l m a rk e ts with
funds d e riv e d p r im a rily fro m d e p o s ito rs in th o se sa m e
m a r k e t s . Y e t we a r e su g g estin g th a t w hile they m a in ­
ta in th e ir function a s lo c a l d e p o s ito r ie s , m in o rity -o w n e d

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banks c o n tr a c t th o se o p e ra tio n s w hich involve the
channeling of funds d ir e c tly b a ck to th e s a m e m a r k e t. M
E s s e n tia lly , th is co n clu sio n sa y s th a t in o r d e r to b e co m e v iab le, a new
m in o rity bank should be v e ry cau tio u s in its lending p o licie s w hile its
p e rso n n e l, f r o m top to b o tto m , le a r n how to run a bank.

B ut th e bank is

a ls o ex p e cte d by the co m m u n ity and, in m an y c a s e s , by its r e g u la to r s , to
p ro v id e fin a n cia l a s s i s ta n c e to m in o rity b u s in e s s e s o p e ra tin g in its c o m ­
m unity.

A s th e FD IC study put it M
it m a y be co m p le te ly u n r e a lis tic to

think th a t both of th e s e ta s k s ca n be a cco m p lish e d sim u lta n e o u sly . M The
co n clu sio n to be d raw n is th a t d e sp ite the o p e ra tin g p ro b le m s fa ce d by
m in o rity b an k s, th ey c a n b e co m e s u c c e s s f u l in stitu tio n s only if they give
th e ir own v ia b ility top p r io r ity .

T h at b rin g s us to an im p o rta n t q u estion :

Is th e r e a sig n ifica n t ro le f o r su ch in stitu tio n s to play even if th ey a r e not
im m e d ia te ly a s a c tiv e in lo c a l lending a s would be a co m p le te ly e x p e rie n ce d
fin an cial in stitu tio n o p eratin g in a m o r e v iab le m a r k e t?

The FD IC study

a n sw e rs th at q u estion in the a f fir m a tiv e :
"T h e y continu e to be u sefu l a s fin a n cia l d e p o s ito rie s
in th e ir co m m u n itie s; they c a n s till tak e so m e ro le
in lending to new b u sin e ss e n te r p r is e s throu gh SBA
g u a ra n te e d lo an s and o th e r such m e c h a n is m s ; they
ca n be an im p o rta n t s o u r c e of new financin g to
m in o rity -o w n e d b u s in e s s e s a f t e r th e s e b u s in e s s e s
d e m o n s tra te so m e in itia l s u c c e s s ; and, fin a lly , they
ca n d evelop a s th e in n e r c ity develop s and ta k e on
add ition al re sp o n sib ility f o r continued develop m en t
a s th e in co m e and em ploym en t c h a r a c t e r i s t i c s of the
m a rk e ts they s e r v i c e im p r o v e s . "
I w ill w ant to r e tu rn to th is q u estion in a few m o m e n ts .




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W hat h as happened s in c e th o se FD IC stu d ies in 1 9 7 3 .

As a ll of you

know, the l a s t coup le of y e a r s h ave b een d ifficu lt ones f o r a ll b an k s.

This

h as shown up in the s t a t i s t i c s on bank loan l o s s e s , se n s a tio n a liz e d p u b lic­
ity on p a r tic u la r b an k s, o u r own l i s t of p ro b lem b an k s, and the f a ilu r e s of
so m e v e ry l a r g e b an k s.

I w ant to tak e a look tonight a t w h eth er the w o rs e n ­

ing of loan l o s s e s th a t took p la ce in m o s t banks w as e x p e rie n ce d to th e sam e
exten t by the m in o rity b an k s.

I a ls o w ant to e xam in e w h eth er the gap in

p ro fita b ility b etw een m in o rity and n o n m in o rity banks h as continued to narrow
a s the 1973 FD IC study su g g ested it would, and w h eth er the p e rfo rm a n c e of
th e s e two g rou p s of banks h as continued to c o n v e rg e .
The 1 9 7 5 o p e ra tin g r e s u lts of m in o rity banks do not m ak e v e ry e n co u rag ­
ing read in g although th ey a r e not in co n s iste n t w ith the a n a ly s e s b a se d on
e a rlie r y e a rs .

In 1973 and 1 9 7 4 , th o se m in o rity banks th at had been in

b u sin e ss f o r a t le a s t fiv e y e a r s w e re p ro fita b le on a v e r a g e and a s a group.
T h is p ic tu re w o rse n e d in 1 9 7 5 .

The banks in o p e ra tio n b e fo re 1963 had a

lo s s on a v e r a g e , and the group e sta b lish e d b etw een 1963 and 1 9 6 8 had only
a v e r y s m a ll p ro fit.

The n e w e r banks a ls o had an a g g re g a te l o s s .

While

we do not h ave s t a t i s t i c s f o r n o n m in o rity banks by a g e , w e do know th at all
banks u n d er $ 5 0 m illio n in a s s e t siz e e a rn e d about 90 ce n ts p e r e v e ry $100
of a s s e t s in 1 9 7 5 .

T h at p e rfo rm a n c e is m u ch s u p e rio r to th e p e rfo rm a n ce

of m in o rity ban ks.
T h e re a r e a n u m b er of d iffe re n c e s in the a v e r a g e p e rfo rm a n c e ra tio s of
m in o rity banks and n o n m in o rity b an k s, but b e c a u s e of the g r e a t v a riab ility




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in the o p eratin g r e s u lts of the m in o rity b an k s, g e n e ra liz a tio n s a r e d ifficu lt
to m ak e and, in f a c t, m o s t of the d iffe re n ce s do not m e e t s ta tis tic ia n s '
te s ts of s ig n ific a n c e .

M in o rity banks do tend to h av e lo w er lo a n -d e p o sit

ra tio s than co m p a ra b ly sized n o n m in o rity b an ks.

M in o rity banks do tend

to h av e g r e a t e r holdings of U. S. G overn m en t s e c u r itie s and lo w er m u n icip al
se c u ritie s .

T h is r e f le c ts th e ir la ck of ea rn in g s su b e ct to ta x .

D ep osits

of the U. S. G overn m en t a r e m o r e im p o rta n t to the m in o rity banks a s a re s u lt
of T r e a s u r y p o licy , but the v o la tility of th e s e d e p o sits m a y m e a n that they
do not co n trib u te sig n ifica n tly to n et p ro fits .

P e rh a p s I am o v e rly sk e p tica l

of su ch d e p o sits b e c a u s e of the F D IC 's e x p e rie n c e with the F a r m e r s State
Bank of D e la w a re .

T h at b an k 's e x c lu s iv e sta tu s a s d e p o s ita ry fo r State

funds did not p re v e n t its c o lla p s e ; in f a c t it m a y h av e co n trib u ted to the b an k's
p ro b le m s.

It m a y be tim e f o r m in o rity b a n k e rs to ta k e a h a rd look a t the

lo n g -ru n p ro fita b ility of th o se d e p o s its .

In any c a s e , M r. M axw ell h as

pointed out th a t so m e m in o rity ban ks, in bidding f o r G overn m en t ag en cy
d e p o sits, m ay h ave cu t m a rg in s below p ro fita b le le v e ls .

T h o se G overnm ent

d ep osits and the liquidity they re q u ire on the a s s e t sid e a r e p a rtly r e s p o n s i­
ble f o r the g r e a t e r holdings of U. S. G overn m en t s e c u r itie s and fo r the s o m e ­
what lo w e r lo a n -d e p o sit ra tio s of the m in o rity b an ks.

The l a t t e r , h o w e v er,

is p robably due in p a rt to the e ffo rts of the banks to c o n tro l the loan lo s s
p rob lem .
On the in co m e sta te m e n t sid e , the co m p a ris o n s a r e g e n e ra lly u n fav o rab le
to the m in o rity b an k s, but the d iffe re n ce s a r e not v e ry pronounced on m o s t




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ite m s .

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E m p lo y e e e x p e n se s and o v e rh e a d a r e s till som ew h at h ig h e r fo r the

m in o rity b an k s, but ex p e n se r a tio s o v e ra ll a r e not sig n ifica n tly d iffe ren t
fro m th o s e of n o n m in o rity ban ks.
In o u r e a r l i e r a n a ly s e s of the b e h a v io r of m in o rity ban ks, we found a
rough tre n d to c o n v e rg e n ce in the o p eratin g c h a r a c t e r i s t i c s of m in o rity
banks to w a rd the n atio n al n o rm o v e r tim e .

T his study co m p a re d the b eh avior

of the m in o rity banks th a t had begun b u sin e ss during th e p erio d 1963 to 1965,
with the b e h a v io r of 4 6 n o n m in o rity banks w hich began o p e ra tio n s w ithin the
sa m e m e tro p o lita n a r e a s during the sa m e tim e p e rio d .
th e s e new banks w e re betw een 10 and 12 y e a r s of a g e .

B y the end of 1 9 7 5 ,
Thus if the c o n v e r ­

sion h y p o th esis is c o r r e c t , th e se s a m e banks should by now exhibit c h a r a c ­
t e r i s t i c s s im ila r to the a v e r a g e co m p a ra b le n o n m in o rity bank.

R o g e r Watson

of o u r R e s e a r c h sta ff h as updated th at e a r l i e r FD IC study through 1 9 7 5 .

He

found th a t net c u r r e n t o p eratin g in co m e w as h ig h e r f o r the n on m in o rity banks,
but r e s u lts f o r individual banks v a rie d a ll o v e r the lo t, so th at th e se d if f e r ­
e n ce s w e re not s ta tis tic a lly sig n ifica n t.

On the b a s is of c o m p a ris o n s we have

m a d e , o th e r than so m e m in o r d iffe re n ce s in rev en u e s o u r c e s w hich can be
explained on the b a s is of ta x a b le e arn in g s b e h a v io r and d iffe re n ce s in c l i ­
e n te le , the sig n ifica n t d iffe re n ce betw een the ea rn in g s exp en se b e h a v io r of
the m in o rity and n o n m in o rity banks a p p e a rs to be in the loan lo s s a r e a .
L o a n lo s s e s of a ll c o m m e r c ia l banks w e re $ 1 . 5 b illion in 1 9 7 3 , i n c r e a s ­
ing to $ 1 .9 b illio n in 1 9 7 4 and $ 3 . 2 billion in 1 9 7 5 .

T his r e p r e s e n te d 0. 2

p e rc e n t of loan s in 1 9 7 3 , 0 . 38 p e rc e n t in 1 9 7 4 , and 0. 63 p e rc e n t in 1 9 7 5 .




- 9 -

Th.e lo s s e x p e rie n c e of s m a l l e r banks w as b e t t e r than the v e ry la r g e ;
banks of un der $50 m illio n in d e p o s its , a ra n g e th a t in clu d es n e a rly a ll
the m in o rity b an k s, had lo s s e s equal to , 3 p e r c e n t of loans in 1 9 7 5 .
The lo s s e x p e rie n c e a t m in o rity banks p a ra lle le d this d e s c rip tio n but
at a su b sta n tia lly h ig h e r le v e l.

A fte r im p rov in g f o r a few y e a r s , m in o rity

ban ks' loan l o s s e s w e re . 7 p e rc e n t of loan s in 1 9 7 3 , but in c r e a s e d to 1 .3
p e rc e n t of lo an s in 1 9 7 5 .

T he p ro v isio n f o r loan l o s s e s acco u n ted f o r about

9 p e rc e n t of to ta l o p eratin g rev en u e fo r the m in o rity banks and un d er 3 p e r ­
ce n t f o r the s m a l l e r n o n m in o rity ban ks.
L o s s e s of th is m agn itu d e a r e sim p ly not c o n s is te n t w ith p ro fitab le
bank o p e ra tio n s .

If loan lo s s r a tio s of the m in o rity banks w e re equal to

th o se of th e n o n m in o rity b an k s, th e m in o rity banks would h av e had r e s p e c t ­
able p ro fits in 1 9 7 5 .

T h e ir ea rn in g s would not h av e been equal to th e non­

m in o rity b an k s, but e x ce p t f o r the im p a c t of th o se loan l o s s e s , the o th e r
a s p e c ts of o p e ra tin g e x p e rie n c e w e re not g r e a tly d iffe re n t fro m o th e r
banks of th e ir s iz e , a g e and lo ca tio n .

A gain , e x ce p t fo r th e s e l o s s e s , the

tren d to w ard c o n v e rg e n c e of o p e ra tin g r e s u lts betw een m in o rity and non­
m in o rity banks se e m e d to co n tin u e.
L o s s e s of the am ount I h av e d e s c rib e d a r e v e ry lik ely to lead to s u p e r ­
v is o ry p ro b le m s , and it is no s e c r e t th a t m in o rity banks h av e had m o re
than th e ir s h a r e of s e rio u s p ro b le m s.

O ver th e l a s t two y e a r s , w e h av e

had f a ilu r e s of th r e e banks th a t, one way o r a n o th e r, m igh t be c la s s if ie d
as m in o rity b an ks, out of a to ta l of 27 f a ilu r e s .




O ver th e l a s t th r e e y e a r s ,

- 10 -

we h ave had a v e r y su b sta n tia l i n c r e a s e in th e n u m b er of banks on ou r
p ro b lem l i s t .

I h av e pointed out in a r e c e n t sta te m e n t th at th a t i n c r e a s e

a p p e a rs to be a r e fle c tio n of the s e v e r e r e c e s s io n th a t re a ch e d its low
point e a r ly l a s t y e a r .

We find th a t the p ro b lem bank li s t i n c r e a s e s during

e v e ry r e c e s s i o n and the f i r s t 12 to 18 m onths o r so of the subsequent
reco v e ry .

The lo g ic a l c u s to m e r s , both b u sin e ss and c o n s u m e r, of

m in o rity banks p robably a r e am ong th o se m o s t a d v e r s e ly a ffe cte d by down­
tu rn s in the eco n o m y .

T he d iffe re n tia l b etw een w hite and nonw hite u n em ­

ploym ent r a t i o s , f o r e x a m p le , in c r e a s e d during the r e c e n t r e c e s s io n .
F u r th e r m o r e , unem ploym ent in c e r t a i n c e n tr a l c i t i e s w h e re m any m in o rity
banks a r e lo ca te d w as h ig h e r than a lm o s t an y w h ere e ls e .

In view of th e se

f a c t o r s , it is not s u rp risin g th a t th e r e h as a ls o been a sig n ifica n t in c r e a s e
in th e n u m b er of m in o rity banks on ou r p ro b le m l i s t .
We a r e se e in g , h o w e v e r, th a t the n u m b er of m in o rity p ro b le m banks is
lev elin g off ju s t a s th e to ta l n u m b er of p ro b lem banks in the econom y seem s
to b e le v e lin g off.

In f a c t , in so m e r e s p e c ts the n u m b er of m in o rity problem

banks re a ch e d its peak e a r l i e r than the to ta l n u m b er of p ro b lem b an k s.

L ast

y e a r a t about th is tim e , th e r e w e re 13 m in o rity banks on o u r p ro b lem bank
l i s t, w h e re a s th is y e a r , th e r e a r e 1 2 .

C o n sid erin g th a t th e r e w e re f a r

fe w e r banks on o u r p ro b lem bank lis t l a s t y e a r than to d ay , the p e rce n ta g e
of m in o rity banks on the p ro b le m lis t h a s , in f a c t , d e c r e a s e d s in c e la s t year.
U n fo rtu n ately , p a r t of the d e c r e a s e is a ttrib u ta b le to the f a ilu r e of two
m in o rity banks o v e r th is p erio d of tim e .




W h atev er the r e la tiv e m ovem ent

11

of the n u m b er of m in o rity banks on the p ro b le m li s t show s, h o w e v e r, the
ra tio of p ro b le m m in o rity banks to a ll m in o rity banks is su b sta n tia lly l a r g e r
than th e r a tio f o r the e n tire bank population.
R eso lvin g th e s e p ro b le m s w ill re q u ire a co m b in atio n of an im p ro v ed
econom y and co m p e te n t m a n a g e m e n t.

It a p p e a rs th a t the eco n o m ic s itu a ­

tion o v e r the n e x t y e a r is going to be fa v o ra b le f o r banking in t e r m s of
g e n e ra l b u sin e ss a c tiv ity , in flation and in t e r e s t r a t e s .

T his m a y not help

m in o rity banks g r e a tly s in c e u n em p loym ent is e x p e cte d to re m a in high
and im p ro v e m e n ts in the econ om y p ro d u ce im p ro v e m e n ts in th e banking
situ atio n only with a tim e la g .

M o re im p o rta n tly , the im p rov in g n ation al

econom y does not p ro d u ce an even e xp an sio n in a ll a r e a s .

Som e co m m u n ­

itie s w ill fe e l su b sta n tia l b en efits f ro m the expanding econom y w hile o th e rs
m ay not.

L a r g e b an ks, with c u s to m e r s a ll o v e r the co u n try o r th e w o rld ,

w ill gain in step with the g e n e ra l eco n o m y , but y o u r situ atio n depends
m uch m o re on y o u r lo c a l eco n o m y .

You a r e m o r e f a m ilia r with y o u r lo c a l

eco n o m ic b a s e than I and t h e r e f o r e ca n b e t t e r judge to w hat e xten t it w ill
im p ro v e ; I sim p ly cau tio n you th a t the g e n e ra lly o p tim istic eco n o m ic f o r e ­
c a s ts m u st be in te r p r e te d by you in light of the m a rk e t y o u r bank is se rv in g .
T h at puts th e bu rd en h e a v ily on m a n a g e m e n t.
re a so n f o r o p tim ism .

H e re a ls o th e r e is so m e

F i r s t of a ll, it a p p e a rs th a t, by and l a r g e , m in o rity

bank m a n a g e m e n t h as coped w ell with m o s t of the p ro b le m s and ch a lle n g es
of s ta rtin g and o p eratin g new c o m m e r c ia l b an k s.




A s ou r stu d ies h ave found,

-

12

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m in o rity banks h av e tended to b e co m e s im ila r in th e ir o p e ra tio n s and
p ro fita b ility , w ith the m a jo r ex ce p tio n of loan l o s s e s , to new n o n m in o rity
b an k s, though it tends to tak e the m in o rity banks som ew hat lo n g e r to
a ch ie v e p ro fita b le o p e ra tio n s .
Second, it a p p e a rs th at im p ro v e m e n t h as been m ad e in the sta b ility of
m in o rity bank m a n a g e m e n t.

We have an aly zed ch an g es in the C EO of 71

m in o rity banks th at h ave been in o p e ra tio n f o r a t le a s t two y e a r s , counting
ch an g es in the C EO p osition s in c e 1 9 7 0 .

T h irty -tw o of the banks had no

ch an g es in C EO s in c e 1 9 7 0 o r sin c e they b egan o p e ra tio n s .

M ost of the

o th e rs had only one chan ge in C E O , and only th r e e had th r e e ch an g es in top
m a n a g e m e n t.

It is not co in cid e n ta l th at th o se banks with g r e a t e r sta b ility

of m an a g e m e n t h av e been m o r e p ro fita b le .

W hile su ch s t a t i s t i c s a r e not

a v a ila b le f o r n o n m in o rity b an ks, I m igh t note th a t the FD IC has had a
tu rn o v e r of nine of its 14 top re g io n a l s u p e rv is o r y p o sitio n s during the
sa m e tim e p e rio d , about the sa m e r a te of m an a g e m e n t tu rn o v e r a s m o st
of y o u r b an k s.

It a p p e a rs then th at m in o rity banks a r e o v e rco m in g the

tend en cy to w ard m an a g e m e n t in sta b ility th at h as c h a r a c t e r i z e d m any p ro b ­
le m situ a tio n s.

T his is a sig n ifica n t a ch ie v e m e n t sin c e m in o rity banks a re

su b ject to losin g a C EO who is s u c c e s s f u l a s w ell a s rem o v in g one who
p ro v e s to be not up to the ta s k ;

Many la r g e banks a r e taking a ffirm a tiv e

a ctio n to em ploy q u alified m in o rity p e rso n n e l and w hat b e tte r pool fo r
re c r u itin g ca n th e r e be than the s u c c e s s f u l m a n a g e rs of m in o rity banks.




'

- 13 -

L e t m e co n clu d e by re tu rn in g to th e ta s k fa ce d by m in o rity bank m a n ­
a g em en t in m e e tin g th e p ro b lem of e x c e s s iv e loan l o s s e s .
th is is a p a r tic u la r ly d ifficu lt p ro b le m .
friv o lo u s ly .

X re c o g n iz e th at

M in o rity banks a r e not o rg a n iz ed

Spokesm en f o r m in o rity banks h a v e said th a t they a r e e sta b lish ed

in la r g e p a r t to m e e t a p e rc e iv e d need f o r fin an cin g by m in o rity c o n s u m e rs
and b u s in e s s e s .

If th a t is one of the g o a ls , and is an a c c e p ta b le one, it is

v e ry d ifficu lt f o r th e m in o rity bank loan o f fic e r to tu rn down an a p p lica tio n
th at p ro m is e s to le a d to an im p ro v e m e n t in th e e co n o m ic c lim a te in the
m in o rity co m m u n ity and, in p a r t i c u l a r , to p ro v id e a s o u r c e of im p ro v ed
em ploym en t o p p o rtu n ities in the co m m u n ity .

M in o rity bank m a n a g e rs m u st

fe e l the w eight of th e ir re s p o n s ib ility to th e co m m u n ity and do a tte m p t to
be re s p o n s iv e to th e s e r e s p o n s ib ilitie s .
I r e c o g n iz e both th is re sp o n sib lity and th e p ro b le m s th at too lib e r a l a
lending p o licy ca n p ro d u ce .

I would rem in d you th a t you h av e a r e s p o n s i­

b ility in co m m o n w ith a ll banks - - a

re sp o n sib ility to y o u rs e lv e s and y o u r

in v e s to rs to be a v ia b le , p ro fita b le s o u r c e of banking s e r v i c e s in th e c o m ­
m unity on a p e rm a n e n t b a s i s .

S u rv iv al in th e long run, and the a b ility to

p rovide banking s e r v i c e s and lo an s in the long ru n , depends on ach iev in g
p ro fita b ility .

T he c o n flic t b etw een th e need f o r p ro fits and the obligation

to the c u s to m e r s you a r e attem p tin g to s e r v e is going to re q u ir e so m e p ain ­
ful d en ials of loan a p p lica tio n s in the m onths ah ead .
has prob ab ly a lr e a d y e x p e rie n ce d th a t tr a u m a .

Indeed, e a ch of you

Saying "n o " in so m e c a s e s

w ill continu e to be an e s s e n tia l t e s t of m an a g e m e n t c o u ra g e and a b ility in




- 14 -

the m onths a h ead .
a p p ro a ch .

In so m e w ays it is e a s i e r now to ta k e a m o r e o b je ctiv e

D is c rim in a tio n in financin g is prob ab ly le s s s e r io u s than it was

when th is m o v e m e n t began in the e a r ly 1 9 6 0 s .

On the c o n su m e r le v e l,

f e d e ra l and s ta te law s h av e b een stiffen ed and e n fo rce m e n t e ffo rts a r e m o re
r ig o r o u s .

T he m in o rity loan a p p lican t who is cre d itw o rth y ca n now seek

a loan w ith co n fid en ce th a t his a p p lica tio n w ill b e rev iew ed on a non­
d isc rim in a to ry b a s i s , m ay b e not a t e v e ry bank in tow n, but a t m o s t.
If you a r e tem p ted to m ak e a loan b e c a u s e of c o n c e r n th a t if yo\i don't,
no one e ls e w ill, p e rh a p s you should sa y "n o " a ls o .

A fte r a ll, you m ay be

w rong a s to how o th e r b a n k e rs would ev alu ate th e loan o r , even w o r s e , you
m a y be rig h t.
The raw fig u re s f ro m th e p a st th at I h av e r e c ite d tonight a r e not too
e n co u ra g in g ; I re c o g n iz e th a t.
co m e a s no s u r p r i s e to you.

B ut I think i t 's a ls o a c c u r a t e to say th at they
What you do w ith th e im p lica tio n s of th e se

f ig u r e s , h o w e v e r, w ill be c r u c i a l in th e m onths ah ead .

The s in c e r ity and

d ed icatio n of the b a n k e rs a t th is convention is c e r ta in ly a hopeful sign.