CENTER FOR COMMUNITY CAPITALISM

CENTER FOR COMMUNITY CAPITALISM

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THE FRANK HAWKINS KENAN INSTITUTE OF PRIVATE ENTERPRISEThe Kenan-Flagler Business School at The University of North Carolina at Chapel Hill www.kenaninstitute.unc.edu

The Center for

Community Capitalism

Evolution of Banking & Access to Financial Services in the U.S.

Prepared for presentation at

World Bank Conference Broadening Urban Access to Financial Services

Cartagena, Columbia

byDr. Michael A. Stegman

Center for Community CapitalismUniversity of North Carolina at Chapel Hill

April 2004


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Why policymakers care whether people are banked

• U.S. policy moving toward asset-based social policies—rewarding work, incentives for taking more responsibility for financial future & retirement security;– People with bank accounts are more than twice as likely to

hold savings, as are people who are unbanked, and are more likely to add to their savings on at least a monthly basis.

– Wealth disparities are greater than income disparities & growing;

– The bottom 90 percent of Americans earn 60 percent of all income,

– but own less than 30 percent of all net worth– and less than 20 percent of total financial assets.

–


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Why banks should care about increasing financial access

• Strong link between account ownership and use of bank credit. Lower-income families with checking, savings, or money market accounts are six times as likely as to have credit cards and are more than twice as likely to have a mortgage.

• Nearly 60 percent of all first-time buyers between now and 2010 will be young minority & immigrant families.

• In practical terms, big part of this growing market segment are not part of the financial mainstream--more than 40 percent of unbanked low- and moderate-income African American and Hispanic renters are unbanked..


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Banking status important to wealth building

– Wealth disparities in U.S. are greater than income disparities & growing;

– The bottom 90 percent of Americans earn 60 percent of all income,

» but own less than 30 percent of all net worth» and less than 20 percent of total financial

assets. – People with bank accounts are more than twice as

likely to hold savings as are people who are unbanked, and are more likely to add to their savings on at least a monthly basis.


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Cross-Selling Potential as the Unbanked Become Banked

0%

10%

20%

30%

40%

50%

60%

Credit card First mortgage Vehicle loan

Actual Rate, Banked

Actual Rate, Unbanked

Estimated Rate as Unbanked become Banked

Source: Jeanne Hogarth, Federal Reserve, 8/1999


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Enormous Growth in Immigrant Purchasing Power

1990-2000Category 1990

Buying Power

(billions)

2001

Buying Power

Percent Change

Market Share 1990

Market Share 2001

Minority Total

$439.9 $860.6 95.6% 10.6% 12.2%

Black $307.8 $572.1 85.9 7.4 8.1

Amer. In. $ 19.2 $ 34.8 81.0 0.5 0.5

Asian $112.9 $253.8 124.8 2.7 3.6

Hispanic $207.5 $452 118.0 5.0 6.4

White $3,715 $6,219.8 67.4 89.4 87.8

Total all races

$4,154.9 $7,080.4 70.4% 100.0% 100.0%


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A Tale of Two Emerging Markets

Population

Households

Average disposable household income

Total household income

Consumer spending power

Spending power/sq. mile

Proximity to large markets & clusters

Average education level

Currency stability

Government stability

Stable, known legal system

American business norms and language

America’s Inner Cities Mexico

25 million

7.7 million

$23,8881

$184 billion

$85 billion

$43,000,0002

High

Medium

High

High

High

High

1 million

18.2 million

$11,240

$205 billion

$72 billion

$96,000

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Low

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Technology is a driving force in banking revolution

• full service branch transaction $1.07• telephone transaction

$0.54• ATM transaction $0.27• on-line transaction $0 1.5


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100 Largest Central Cities: ATMs Per Capita by Neighborhood Location & Household Income, 2002

(ATM addresses per 10,000 people)

17.3

7.6 6.9

28.7

8.2 7.6

INNER RING MIDDLE RING OUTER RING

Tract Location

ATM

Add

ress

es p

er 1

0K P

op

Low Income (<80% AMI)

High Income (80+% AMI)


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The rise of fee-based banking has potential to convert unbanked into profitable customers

• No longer do banks make most of their money from the interest spread.

• Non-interest revenues, particularly fee income, is driving bank income.

– Bank fees in U.S. accounted for 44% of net operating revenues for commercial banks in 1999;

• ATM surcharges generate $2 billion in revenues

• bounced check fees generated $6 billion profits.

• Banks starting to charge for over-the-counter (teller) transactions;

• A global phenomenon – India, Hong Kong, New Zealand, Canada, Thailand.


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Same technology driving banking is driving changes in social safety net delivery system

• A Revolution in delivery of means tested benefits– EFT’99 --Beginning 1999, federal benefit recipients start receiving benefits by direct

deposit—originally mandatory, now voluntary;– By end of 2002, food stamps had to be delivered electronically;– More than 35 states have added distribution of welfare benefits to the magnetic

swipe card used to distribute food benefits.

• Treasury’s First Accounts initiative– On May 2, 2002,Treasury awarded 15 grants totaling $8+ million to financial

institutions to assist 35,500 unbanked low- and moderate-income individuals open accounts.

• Awardees were selected from among 231 applications from 38 states.• Awards go to nonprofits, insured depositories, CDFIs, faith-based

organizations, and local governments to aggregate unbanked market through employers, schools, tax preparation services, day care services.


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Electronic delivery of government benefits has hidden policy potential

“EFT could soon result in millions of Americans being brought into the banking system for the first time, and it will change dramatically the way in which they handle money.”

Treasury Secretary, Robert E. Rubin


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Like the non-poor, the poor respond to savings incentives: The Results of the National IDA

Demonstration

• The study included 14 programs and 1,326 participants.

• 90% of participants had incomes beneath 200% of poverty.

• Participants saved an average of $33 per month.

• Poorer families saved proportionately more than higher-income families, and savings was not influenced by income.

• Participants saved regularly--making deposits 7 out of every 10 months--and maximized the benefits of the program, saving 71% of what they could save and have matched.


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75 years of U.S. banking legislation:the Great Depression

• 1930s – federal deposit insurance (the FDIC) -- $2,500 per account, periodically raised to $100,000 in 1980;

• Congress erects barriers between commercial banking, investment banking, insurance & brokerage services;

• Federal support of residential mortgage market– 1/6 of all U.S. home mortgages refinanced;– introduction of federal home mortgage insurance;– creation of federally supported secondary mortgage

market (Fannie Mae);

• Federal Credit Union Act – federal charters for institutions serving small savers.


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75 years of U.S. banking legislationcombating redlining & reduced access to credit

The 1960s & 1970s• President Kennedy’s Executive Order on equal opportunity

• The 1964 Civil Rights Act

• Home Mortgage Disclosure Act

– covered institutions publicly report on loan applications, denials, and approvals, by neighborhood

• Community Reinvestment Act (CRA)

– requires insured institutions to meet depository & credit needs of all populations in its service area


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75 years of U.S. banking legislationthe savings & loan crisis

• 1980 – deregulation of deposit interest rate ceilings, broadening the power of thrifts to invest, raising deposit insurance from $40,000 to $100,000 per account;

• 1989 – the federal bailout of failed savings & loans – between 1980 & 1994, 9% of all insured banks failed;


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The Community Reinvestment Act

• Passed in 1977, the purpose of the CRA is to fight redlining and increase bank lending in LMI neighborhoods.

• CRA enforced by examining CRA record of banks, issuing written report with rating, & taking account of bank’s CRA record when considering application to expand business.

• Revised in 1996 to be more results-driven.


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3 CRA Performance Tests

• Lending test -- evaluates bank’s home mortgage, small business, community development lending;

• Investment test – measures direct equity investment in CD projects;

• Service test – deals with provision of retail banking, and CD services.

• When enacted in 1977, CRA covered 70% of all U.S. savings; today it is only about 30%


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Federal Reserve Board study of mortgage profitability

• “…lenders active in lower-income neighborhoods and with lower-income borrowers appear to be as profitable as other home purchase lenders.”

• “…We find no compelling evidence of lower income profitability at commercial banks that specialize in home purchase lending in lower income neighborhoods or to lower-income borrowers.”

Glenn Canner and Wayne Passmore, The Community Reinvestment Act and the Profitability of Mortgage-Oriented Banks, March 3, 1997


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Community development finance comes of age in the 1990s

The 1990s• Congress funds a network of specialized community development financial

institutions (CDFIs)who specialize in increasing access to financial services and capital

• community development banks (32 depositories with $4+ billion in deposits in 2001);

• community development credit unions (130+)• community development loan funds• microcredit programs• community development venture funds (equity)

• Recent sampling of CDFI performance found that 81 CDFIs managing $1.8 billion in assets provided more than $2.9 billion in financing, with 1.8% cumulative loss rate.

• Annual congressional appropriations to network of 633 certified CDFIs $60-$125 million/year


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150 years of U.S. banking legislation:financial modernization

1998 Congress comes full circle • Removes barriers enacted in 1933 between

commercial banks, investment banking, insurance & brokerage services – effectively repeals depression era-prohibitions against integration of financial services.


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Enormous consolidation in the number of banks, if not in banking offices

U.S., 1965-2001

13,544 14,417

8,080

15,872

65,564

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

1965 1970 1975 1980 1985 1990 1995 2001

Year

Inst

itu

tio

ns

14,000

24,000

34,000

44,000

54,000

64,000

Bra

nch

es

Institutions

Branches


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Amidst consolidation, new banks are still being chartered

140

84

336

609

360182

246

205

331

102

129

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

1965 1970 1975 1980 1985 1990 1995 2001

Year

Un

assi

sted

Mer

ger

s

0

25

50

75

100

125

150

175

200

225

250

275

300

325

350

375

400

New

Ch

arte

rs

Mergers

New charters


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But U.S. still “overbanked” Persons per bank branch in U.S., 2003

3,313

2,019

5,720

0

1,000

2,000

3,000

4,000

5,000

6,000

National Average North Dakota (Lowest)

California Largest


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Two Eras of Bank Failures in U.S.


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For more information

• Center for Community Capitalism web site – www.ccc.unc.edu.

• Call at 919-962-6849

CENTER FOR COMMUNITY CAPITALISM

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