U.S. Minority Banks: Why So Few — After 150 Years?

57 Pages Posted: 20 Aug 2019 Last revised: 9 Sep 2020

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

Jiayi Xu

Auburn University

Date Written: July 22, 2020

Abstract

In 1865, the first minority bank in the United States was established. Over time, banks owned or controlled by minorities have grown in number. Yet, one hundred and fifty years later, they still account for only 2.8 percent of all banks. The contribution of this paper is fourfold. First, it provides a comprehensive assessment of the role of different types of MDIs in the banking industry as well as the characteristics of the communities in which they operate. Second, it contributes to the corporate finance literature that focuses on the extent to which the diversity of ownership/control affects the performance and riskiness of firms, but is among the few that does so in terms of majority ownership/control of banks. Third, the paper examines the recent performance of MDIs from the perspective of whether their disproportionately small role in the banking industry is due to their relatively poorer and riskier performance as compared to non-MDIs. Fourth, a check on the robustness of the results is provided, including for the first time using two different databases on MDIs, one from the FDIC and the other from the FRB. It is found the MDIs are in communities in which the largest share of the population is a minority and one in which income and poverty are worse compared to national averages. Importantly, when MDIs are compared to non-MDIs the results indicate the MDIs generally, in contrast to most previous studies, show no sign of underperformance or greater riskiness. The policy issue that arises for future research based on this finding is if it is not performance and risk then what does explain the lack of significant diversity in terms of ownership/control in the US banking industry.

Keywords: Minority Banks, Bank Performance, Bank Risk, Bank Branches

JEL Classification: G20, G21, G28, R10

Suggested Citation

Barth, James R. and Xu, Jiayi, U.S. Minority Banks: Why So Few — After 150 Years? (July 22, 2020). Available at SSRN: https://ssrn.com/abstract=3438390 or http://dx.doi.org/10.2139/ssrn.3438390

James R. Barth

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
334-844-2469 (Phone)
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Milken Institute ( email )

1250 Fourth Street
Santa Monica, CA 90401
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Jiayi Xu (Contact Author)

Auburn University ( email )

309A, Comer Hall
Auburn, AL 36849
United States

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