FDIC Focuses on Minority Depository Institutions

Financial Services Law

What happened

Shining a light on minority depository institutions (MDIs), in June 2019, the Federal Deposit Insurance Corporation (FDIC) hosted the 2019 Interagency Minority Depository Institution and CDFI Bank Conference in partnership with the Federal Reserve Board of Governors and the Office of the Comptroller of the Currency. The two-day conference centered on MDIs, with topics including innovation, supervision, cybersecurity and federal programs supporting MDIs.

Under the Financial Institutions Reform, Recovery and Enforcement Act, an MDI is generally defined as any depository institution where 51 percent or more of the stock is owned by one or more socially and economically disadvantaged individuals. More recently, the FDIC has set out a process for depositories to elect MDI status if they have a majority of minority board members and predominantly serve minority individuals.

“The health of Minority Depository Institutions (MDIs) is essential to the health of our nation’s financial system,” FDIC Chair Jelena McWilliams said. The “FDIC is dedicated to preserving and promoting the financial strength of MDIs. The vitality of these banks is critical given their role in supporting the economic well-being of minority and traditionally underserved communities.”

On June 25, 2019, the FDIC also released a new research study on MDIs and their role in and impact on the financial services industry and the communities they serve. In the study, “Minority Depository Institutions: Structure, Performance and Social Impact,” the FDIC outlined the “essential role” MDIs play in serving low- and moderate-income customers. “A key conclusion of this study is that MDIs have had a substantial impact on the communities they serve,” the FDIC wrote.

The study evaluated the demographics, structural change, geography, financial performance and social impact of MDIs from 2001 to 2018, noting that financial performance has “significantly improved” over the past five years, particularly in terms of revenue generation and loan performance.

At the same time, MDIs continue to consolidate. Leading up to the 2008 financial crisis, the number of MDIs jumped from 164 to 215 before declining to 149 as of December 31, 2018, also reflecting an overall steady pace of consolidation within the financial institutions industry generally. More than 75 percent of the assets of the merged institutions and 86 percent of the assets of the failed institutions remained with MDI institutions.

During this period, the number of African American MDIs declined by more than half, from roughly 30 percent to just 15 percent. The number of Native American, Hispanic American and Asian American MDIs increased during the same period, however.

MDIs tend to be younger institutions, the FDIC noted, with a median age of 34 years as compared with 98 years for community banks. They also originate a greater share of mortgage originations to borrowers in low- to moderate-income census tracts and originate a greater share of Home Mortgage Disclosure Act-reported loans to minorities.

In recent years, the total number of MDI offices has decreased, consistent with the national downward trend in the number of bank offices, the FDIC found. Geographically linked to the communities they serve, MDI headquarters are overwhelmingly concentrated in metropolitan areas.

MDIs have historically had higher expenses than non-MDI community banks, according to the study. While the gap between the two has narrowed since 2013—with technology helping to cut costs—MDI overhead expenses are still “well above” those of other institutions, the FDIC said.

To read the FDIC’s MDI study, click here.

As part of its efforts to promote MDIs, the FDIC is also hosting roundtables between MDIs and other FDIC-supervised institutions to share expertise and foster collaboration. “Collaborative partnerships among large banks and MDIs are critically important not only for individual insured institutions, but also for their communities and the vitality of the overall financial system,” McWilliams said in a statement about the event.

Examples of such collaboration include direct investments and deposits in MDIs; loan participations, other lending arrangements and sharing of loan servicing; sharing of bank staff and other resources; and information networking, the FDIC said. Such efforts serve bank customers that neither institution could serve alone, the agency added, and can more generally improve the quality and reduce the costs of products and services.

Why it matters

The FDIC is focused on MDIs and has indicated that it will increase its efforts to expand access to and use of mainstream financial services by those who are unbanked and underbanked so that MDIs are better positioned to serve their communities. This fall, the FDIC will establish a new MDI subcommittee of the FDIC’s Community Banking Advisory Committee. The FDIC is also working on a revised policy statement regarding MDIs to emphasize its commitment. Building on its research, the roundtable and the interagency conference, the FDIC said it intends to pursue additional initiatives to promote and support MDIs, from targeted training for agency examination staff to raising awareness among insured institutions to clarification on how relationships between MDIs and non-MDIs receive consideration under the Community Reinvestment Act.