Robert F. Smith, a billionaire who is the nation’s wealthiest Black person, has been pitching an AWESOME idea to big banks and corporate America in an effort to achieve national equity:  They should use 2% of their annual net income for the next decade to invest directly in banking, telecom, technology, education and health care infrastructure to benefit Black communities, plus capitalize financial institutions that service Black-owned businesses and Black entrepreneurs. 

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According to Forbes magazine, "The balance sheets of the nation’s 4,700 banks are made up of $20.3 trillion of assets, but only 21 of those banks are Black-owned or led, and they have total assets of just $5 billion, less than 1% of America’s commercial banking assets.  Blacks make up 13% of the population of the United States."

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Mr. Smith makes the case that the net income of the ten largest U.S. banks was $968 billion over the past ten years.  Therefore, a mere 2% of that number would be around $19.4 billion — a solid amount to fund the core Tier 1 capital (i.e. the bank's disclosed reserves, a.k.a. retained  earnings, and common stock that insulates it against riskier transactions like trading, investing and lending) of community development banks and minority depository institutions that primarily service Black communities. 

 

This is incredibly important.  While White business owners rely primarily on business loans from banks for their funding, Black business owners rely heavily on the use of personal credit cards.  Among many other issues, including credit availability and blatant discrimination, this trend is perpetuated by the belief held by many Black Americans (58 percent) — a belief that is, by the way, backed by evidence — that why bother because their businesses would likely be rejected by lenders anyway.  The end result, according to the Kauffman Foundation, a non-profit, private foundation, is that Black entrepreneurs are "almost three times as likely as White entrepreneurs to have profitability hurt by lack of access to capital and more than twice as likely as White entrepreneurs to have profits negatively impacted by the cost of capital."  Read the entire report here.

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The few banking relationships Black business owners do have are usually with CDFIs.  Community Development Financial Institutions (CDFIs) are nonprofit organizations that rely on government funding and charitable donations to make loans, and they often lend to minority-owned businesses.  Essentially, CDFIs are specialized financial institutions that service underserved businesses in economically distressed markets.  CDFIs are invaluable to minority business owners because they use flexible underwriting standards.  As of April 14, 2020, there were 1,142 certified CDFIs comprised of loan funds (48%), credit unions (28%), banks or thrifts (13%), depository institution holding companies (9%), and venture capital funds (1%).

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To further leverage his fantastic recommendation, Mr. Smith suggests the contributed capital could be combined with the Term Asset-Backed Securities Loan Facility that the Federal Reserve established to support consumer and business credit during the COVID-19 crisis.  The Federal Reserve established the Term Asset-Backed Securities Loan Facility (TALF) on March 23, 2020 "to support the flow of credit to consumers and businesses. The TALF enables the issuance of asset-backed securities (ABS) backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration (SBA), and certain other assets.  Under the TALF, the Federal Reserve lends on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans.  The Federal Reserve lends an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS."  Mr. Smith also says that the contributed capital could possibly be given in a way where the contributor could enjoy tax benefits.  

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This idea is mutually beneficial.  McKinsey & Company, a management consulting firm, reports that, "As the world evolves, financial services companies should view financial inclusion of Black Americans as a critical business imperative.  In a time of severe economic inequality, companies that lead the way in creating solutions for Black communities have an opportunity to build an enduring legacy that is aligned with consumer demand; indeed, 64 percent of Americans say that a company’s primary purpose should be making the world better, and by 2043, the majority of Americans will be people of color.  In addition, our present moment represents a meaningful opportunity to counter decades of exclusionary practices and rebuild trust with Black communities.  Doing so could improve the competitiveness of financial services firms and accelerate financial inclusion for Black families."

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Evidence:

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Nathan Vardi.  "Inside Billionaire Robert Smith's Bold Plan to Funnel Billions to America's Black Owned Businesses."  Forbes.  19 June 2020  

Aria Florant, J.P. Julien, Shelley Stewart, Nina Yancy and Jason Wright.  "The Case for Accelerating Financial Inclusion in Black Communities."  McKinsey &
   Company.  25 Feb 2020

Alicia Robb and Arnobio Morelix.  "Startup Financing Trends by Race: How Access to Capital Impacts Profitability."  Kauffman Foundation.  October 2016

United States.  Department of the Treasury.  "Community Development Financial Institutions  Fund."  29 June 2020

United States.  Board of Governors of the Federal Reserve System.  "Term Asset-Backed Securities Loan Facility."  18 Aug 2020