The Effect of Minority Bank Ownership on Minority Credit

Abstract

We study the effect of racial minority bank ownership on minority credit access. Using new linked data on bank ownership, loan officers, and minority borrowers, we present four main findings. First, minority- owned banks specialize in same-race mortgage lending. Almost 70 percent of their mortgages go to borrowers of bank owners’ same race. Second, the effect of minority bank ownership on minority credit is large and exceeds that of minority loan officers. We find that minority borrowers applying for mortgages in banks whose owners are of the same minority group are nine percentage points more likely to be approved than otherwise identical minority borrowers in non-minority banks. This effect is over six times that of a minority loan officer. Third, evidence from plausibly exogenous bank collapses suggests that the effect of minority bank ownership might reflect an expansion rather than a reallocation of credit to minorities. Fourth, the default rate of minority banks’ same-race borrowers is much lower than that of otherwise-identical borrowers of other races. These findings are consistent with minority bank ownership reducing information asymmetry and inconsistent with owners’ preferences driving the observed effects on minority credit access.