Published Jun 22, 2020 Aron Betru
Thousands are dead, millions are sick, and billions have been dislocated by an unprecedented global crisis brought on by the COVID-19 pandemic. Adding insult to injury, the US is now ravaged by civil unrest stemming from long-standing abuse of African Americans by police departments, criminal justice systems, and crippling structural racism. These issues are not mutually exclusive; they are linked. While it is true that the high prevalence of underlying health issues (i.e., hypertension, diabetes, and heart disease) makes it difficult for racial minorities to withstand the crisis, the reality is that the illusiveness of the American Dream for African Americans created socio-economic vulnerabilities—income, health, education, security—long before this pandemic.
In response to the COVID-19 crisis, the US government engaged in the largest-ever stimulus effort to ensure Americans can withstand the resulting economic shock. But the delivery system for this stimulus failed to take account of the on-the-ground realities faced by African American-owned small businesses and banks.
For example, the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Paycheck Protection Program (PPP) was designed to keep small business workers on the payroll, but the initial phase of the program resulted in lenders prioritizing existing customers, which seldom included minority communities, considering approximately 70 percent of minority neighborhoods do not have a bank branch. Moreover, because 94 percent of black businesses are sole proprietors and underbanked, it is likely that the PPP will remain out of reach of most black businesses. Why does this matter? Without access to capital, many African American households will not have enough jobs and income to weather the current crisis. More importantly, few African Americans will be able to save and create wealth to ensure they can invest in their health, their children’s education, let alone in the entrepreneurs and job creators in their community.
There have been some positive steps, a set aside for Community Development Financial Institutions, but more is needed to include black banks. In a recent Milken Institute research report, even though minority-owned depository institutions (MDIs) were seen as potential economic development engines due to their relative concentration in minority and low-income communities, they themselves were struggling with capacity limitations in the pre-COVID environment. Effectively, although MDIs are just as efficient as non-MDIs, MDI’s small scale does not allow them to move fast enough, especially in times like these, but they are exactly the type of anchor institution needed. If we want to ensure access to the stimulus in the CARES Act reaches African Americans, we have to ensure the intermediaries that serve them are scaled up to play their part. MDIs need Tier-1 Equity Capital.
Beyond the current crisis, access to capital remains the most important factor limiting the ability of many minority-owned business enterprises (MBEs) to increase scale and drive economic development for that community and the nation at large. McKinsey Global Institute (MGI) research shows that MBEs contribute $1.26 trillion to the US economy in annual revenues and provide 8.8 million jobs to Americans; however, only 1 percent of venture capital money goes to entrepreneurs of color. African Americans are overrepresented in the current crisis but underrepresented in the relief and recovery efforts.
After years of looking at the problem, publishing countless papers on the issues, testifying in Congress, and serving as co-chair for the Partnership for Lending in Underserved Markets (PLUM), one thing is clear to me, only through a whole-of-government effort can we leverage the whole of private markets to benefit the whole of the country. It is imperative that MBEs not only survive this crisis but thrive in the recovery. If we can drive toward capital parity for MBEs, this could grow the US economy between $1 trillion and $1.5 trillion between 2020 and 2028—4 to 6 percent of the projected GDP in 2028, according to the same MGI study. If we want to ignite this potential, both for African Americans and the country at large, we need immediate relief and a longer-term revitalization strategy.
For immediate relief, the Treasury Department and the Small Business Administration should enhance their efforts to ensure access for underserved communities leveraging MDIs and Community Development Financial Institutions (CDFIs):
1. Prioritize access for banks with less than $1 billion in assets from 16:00 EDT to 24:00 EDT every day for the remaining second tranche of PPP capacity, similar to what they did on April 29, 2020.
2. Create a $10 billion set aside for MDIs (exclusively) to ensure relief for the significant number of under/unbanked low-income communities they serve, similar to the existing CDFI carve-out.
3. Remove the Small Business Administration’s requirements that only approved PPP lenders can purchase PPP loans on the secondary market, with the exception of the Office of Foreign Assets Control (OFAC) or other relevant sanctioned institutions, thereby increasing the scale of potential secondary-market participants contributing to the PPP’s mission.
4. Create a mechanism to track information on the types of small businesses that received funding from the PPP as part of the information gathering required during the forgiveness process, to begin in six months.
For longer-term revitalization, we need to focus on the resilience of MBEs and other disadvantaged communities prioritized by increasing the capacity of the diverse asset manager and banking sectors to provide increased access to capital to these communities and promote their participation in the post-COVID recovery. We must grow the number of minority-owned financial intermediaries (banks and asset managers) to leverage their community networks and ensure diverse entrepreneurs and businesses can pursue their own American Dream:
5. Fully fund the Minority Business Development Agency $3 billion initiative to build growth equity funds leveraging diverse investment managers.
6. Provide $2 billion in federal resources of non-dilutive equity to enhance the Tier-1 Equity Capital of MDIs that support underserved communities. This capital should be nonrecourse if a particular impact threshold is met (e.g., aligned to CDFI Fund’s requirement that 60 percent of the portfolio is for disadvantaged communities). Ensure a minimum $1 billion carve-out dedicated to African American-owned MDIs in accordance to Section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 mission to “preserve and encourage the creation of new MDIs.”
7. Provide $1 billion in appropriations to enable the CDFI Fund to prioritize and award grants to CDFIs with a demonstrated record of financing at least 60 percent of its financial services to targeted populations, as defined by the CDFI Fund, and include a 30 percent carve-out for African American-owned and led CDFIs.
8. Expand the Federal Reserve's Term Asset-Backed Securities Loan Facility to all investment-grade asset-backed securities (beyond AAA securitizations to widen applicable small business support) and create a dedicated carve-out for MDI Trust Preferred Securities to enable lower-cost, Tier-1 capital-qualified equity investments.
9. Relax Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and National Credit Union Administration third-party risk management requirements to further enable MDIs, CDFIs, and Impact Banks to leverage technology solutions and bank-nonbank partnerships to more effectively respond to small business concerns in affected communities.
10. Enact HR 5315 and HR 5322 and fully resource Treasury's Minority Bank Deposit Program to increase deposits in MDIs that target underserved communities to ensure continued capacity to provide access to capital, and Treasury's Fiscal Agent Mentor Protégé Program to facilitate greater national bank and small bank collaboration to ensure continued capacity to serve underserved communities.
11. Amend the 2017 Tax Cuts and Jobs Act by adding a provision that allows investments into MDI Banks, CDFI Banks, and Impact Banks to qualify for Opportunity Zone benefits.
In the coming days, the need for police and criminal justice reform will fill much of our thoughts and feelings, and rightly so. We must take the time to remember how Ahmaud Arbery, Tony McDade, Sean Reed, Breonna Taylor, George Floyd, and countless other African Americans had their lives tragically cut short. Until we in the African American community are truly served and protected by the legal system, too many of us will not be able to access the American Dream, much less contribute to it. At the appropriate time in these conversations and policy initiatives, let’s make sure to think about what should come next. With African American median-household wealth projected to fall to zero by 2053, the twin health and economic shocks will have a devastating effect on African American communities, and will likely accelerate this decline if we do not act. We, the people of the United States, are capable of amazing feats when we work together. Now is the time to act and bring the American Dream within reach of everyone.
Aron Betru is the Managing Director of the Milken Institute Center for Financial Markets.