Jacob W. Faber is an assistant professor at New York University Wagner School of Public Service. Terri Friedline is an assistant professor at the University of Kansas.
President Trump and Congress continue to chip away at regulations for financial institutions, arguing, in part, that these moves will support small and community banks. "Our smaller banks are engines of growth," House Speaker Paul D. Ryan (R-Wis.) said when the bank deregulation bill passed last month. "This bill opens the door to new opportunities for families and small businesses."
However, community banks' racially discriminatory patterns are well-documented when it comes to locating branches and making loans . This week, we published a study that reveals that these practices are present even in the most basic of products: entry-level checking accounts.
Ninety-eight percent of Americans who use a bank have a checking account; it is necessary for a wide range of transactions that shape everyday life and enable investment for the future. A checking account is essentially a prerequisite for almost all other types of financial services — from savings accounts to home loans. As a result, banks' racially disparate patterns in costs and fees for these accounts threaten to claw back advances that consumers and communities of color have made toward full participation in the economy.
Our analysis of data from 1,344 banks — a random national sample of mostly small and community banks — shows that minimum opening deposits and other fees associated with checking accounts are significantly higher in communities of color than in white communities.
The minimum opening deposit represents the cash that consumers must have on hand to open an account. Our study found that new customers in cities and towns with white majorities needed an average of only $68 to open a checking account, while those in cities and towns with black and other majorities needed from $7 to $22 more. Racial disparities hold even after controlling for factors such as education level, poverty and competition from alternative financial services.
When we add up minimum opening deposits, maintenance fees, minimum balances and overdraft fees, the average checking account costs are $190.09 higher for blacks, $25.53 higher for Asians, and $262.09 higher for Latinos than they are for whites.
Taken together with existing income inequalities , these requirements mean consumers of color must keep a higher percentage of their money in their checking accounts where it cannot be used. White customers need to keep about 28 percent of their paychecks in their accounts to maintain their balance and avoid maintenance fees, compared with 60 percent for blacks, 54 percent for Latinos and 22 percent for Asians.
The discriminatory patterns that emerge in our study conflict with the wholesome, friendly public image of community banks — in contrast to large, national banks, where reports of racial discrimination have become familiar. But the big national banks only emerged in the 1990s, when deregulation policies allowed them to expand across state lines; for many decades before that, smaller banks, like many commercial institutions in a historically segregated America, underserved nonwhite consumers. Meanwhile, those earlier banks that did serve black and brown communities were often undermined — or, as in the case of the 1921 race riot that destroyed the "black Wall Street" in Tulsa, burned to the ground.
Bank deregulation fails to take this history into account. Under the new banking law, ominously, 85 percent of the banks that make home mortgage loans are no longer required to report borrowers' race and ethnicity, making it impossible to continue tracking patterns of racial discrimination in the lending market .
Meanwhile, impulsive deregulation desires eclipse memories of the housing market's rise and collapse that initiated the Great Recession only a decade ago.
Steady rollbacks of consumer protections are underway at the Consumer Financial Protection Bureau , which was established in 2010 to enhance bank regulation in response to the Great Recession. For example, the CFPB's rule that would have eliminated mandatory arbitration clauses in the terms of banks' checking accounts and would have allowed consumers to hold banks accountable through class action litigation was overturned by congressional review. Under its new leadership, the CFPB is reconsidering its enforcement of disparate impact claims under the Equal Credit Opportunity Act, which prohibits lending discrimination.
The mutually reinforcing trends of deregulation bills and rollbacks of consumer protections place communities of color at risk for discriminatory banking practices — even for the most basic of products. Worse, these coordinated trends suppress the economic power of these consumers and communities by detaining a greater share of their earnings in the same financial system that discriminates against them.