Banking and Community: A Conversation with Oscar Perry Abello

Truth to Power is a regular series of conversations with writers about the promises and pitfalls of movements for social justice. From the roots of racial capitalism to the psychic toll of poverty, from resource wars to popular uprisings, the interviews in this column focus on how to write about the myriad causes of oppression and the organized desire for a better world.

This interview has been edited for length and clarity.

Steve Dubb: Your book The Banks We Deserve came out recently. What made you want to write a book about community banking?

Oscar Perry Abello: In my work as an economic justice correspondent at Next City, I had written all these stories about credit unions, community banking, and CDFIs [Community Development Financial Institutions]. In my head, all these stories combined added up to something greater than the sum of the parts. It says something about the world, more than each story separately.

I just really needed to put it all in one place, have the receipts so to speak, to start having different conversations about the banking system—what it could look like, what it has looked like, and what it needs to look like if we want to eliminate racial disparities, address climate change, or build housing that people can afford. The banking system can support that work better if it’s more local, more locally owned, and more locally controlled.

This is the banking system that we used to have. You didn’t have to go begging to big banks. We are missing the history, information, and data that shows local banking has done big things for this country.

SD: How does your definition of a community bank differ in terms of operations from the big four banks of Citi, Wells Fargo, JP Morgan Chase, and Bank of America?

OA: There is no set definition. The FDIC [Federal Deposit Insurance Corporation] has a definition, which allows me to say how many local community banks we had in 1984 and how many we have today. Ponce Bank is a good example. They have $3 billion in assets and have branches in the Bronx, Queens, Brooklyn, Manhattan, and Union City, New Jersey, which is all within one metropolitan area.

In terms of operations, one of the key differences is that local banks use a lot of manual underwriting. This is underwriting that requires going out and talking to people. Knowing the neighborhood. Knowing that this neighborhood needs this grocery store or this restaurant.

In terms of operations, one of the key differences is that local banks use a lot of manual underwriting. This is underwriting that requires going out and talking to people.

It requires knowing people and communities and neighborhoods and being able to assess risk based on that. Not just the hard finance factors that big banks use. That’s the modus operandi of a big bank. Using those hard figures ends up locking out so many people in communities.

Community banks know their neighborhoods. The work that they did to say that this loan to this person, to this business, in this neighborhood is a good loan is part of the credit memo. The regulators, the bank examiners, want to see that. It counts to them as managing risk responsibly.

SD: We tend to romanticize community banks. But as you point out, today only about three in 100 community banks are owned by people of color. What does the real world of community banking, warts and all, look like?

OA: We have 4,100 community banks and about 4,000 of them are serving primarily White neighborhoods. Everyone will say we lend to who we know and who we trust. We do manual underwriting. We will make the $50,000 loan to a startup diner owner. Because eventually the business will need $200,000 to buy a second building.

But we live in a segregated country. I can look at your board, loan officers, and leadership, and I know who you know. There is data from the National Bankers Association and other research that shows that banks tend to lend to people who look like their leadership and ownership. Race still matters. And only 3 percent of community banks are own or led by people of color.

If you zoom in to one city, you’ll often find, as in New York City, that there is one Black-owned bank and one Latino-owned bank, and 20 White-owned banks. It is no mystery to me why it is easier for certain neighborhoods to access this lending for smaller businesses or housing.

That has been true from the beginning. Shareholders need to come together to get a bank charter. Who had the wealth? Before the Civil War, Black communities were the wealth; they didn’t own the wealth. This is why banks have always been rare in communities of color. They have been rare for the initial [historic] wealth disparity.

In the few communities where Black people did get to own their own banks—such as in Durham [North Carolina] or Tulsa [Oklahoma]—what happened to those communities? White communities often burned them down because of the threat they posed to White supremacy. Or, if they survived that, in the mid-20th century, they were destroyed by urban renewal. More than 1,600 Black communities, over 300,000 families, were displaced by urban renewal. This all goes to explain why there are so few community banks in communities of color.

SD: In the book you write about the Freedman’s Bank in 1865 at the end of the Civil War and its demise. What lessons do you hope readers will take from that example?

OA: The goal is both to help anybody understand why it is harder to create community banks in Black communities today. The demise of the Freedman’s Bank is part of the headwinds—the hesitation it instilled in so many Black communities across the country.

A lot of people had their money stolen. That’s a legit lesson to learn. That’s one reason why there is still skepticism and disillusionment and apprehension in Black communities when it comes to the banking system. It doesn’t mean they shouldn’t have banks. It is just harder. It is one of the reasons why we have the CDFIs, to provide that extra bit of startup capital you need to talk to folks and build the trust that is necessary to become a bank or a credit union in the Black community.

SD: What would you say are some of the key factors that have been behind some of the successful people-of-color-owned community banks that you profile?

OA: The success factors are the same as with White community banks. There are relationships to build. There is trust. The willingness to do the work it takes to know these neighborhoods.

The return you get back from building that trust are the deposits. At Ponce, the bank deposits are the savings of working-class folks, especially in the Bronx. Their life savings. Their whole family’s savings. That is patient, long-term flexible capital. A lot of folks in the CDFI industry talk about deposits as fickle. Some deposits will come in and out. But community banks like Ponce or Abacus [Federal Savings] in Chinatown, they still do the passbooks savings account. That’s sticky capital that isn’t going anywhere.

Similarly with the Brooklyn Coop Credit Union, which is small, about $50 million in assets. Those deposits are similarly sticky and aren’t moving anywhere. For the bank, federally insured deposits are the cheapest capital around, cheaper than the rates the US government itself borrows at.

This results in a seemingly anomalous result: It is often cheaper working with a local community bank than a national CDFI loan fund. Why? The local bank has insured FDIC deposits. When you have the deposit base, you don’t have to wait to raise the funds.

Last June, Brooklyn Coop Credit Union was looking at how to support local worker-owned cooperatives. The bankers interviewed worker co-op member-owners about their business needs. They had a board meeting (with the board members representing depositors), and the credit union’s staff discussed how to open our small business lending for worker-owned cooperatives. Staff noted that they couldn’t do the normal thing of getting a personal guarantee when the business is owned by multiple people. Six months later, boom—the product is out with a working capital line of credit. That capital is going to be pretty cheap. It’s a credit union. They have deposits to back those loans. They didn’t have to pitch to impact investors to make the loans and then make the loans. They just deployed.

SD: You write about “mutual banks.” Could you explain what a mutual bank is and what role they have played in banking both historically and today?

OA: A mutual bank that is a bank that is owned and controlled by its depositors. It is similar to a credit union but pays taxes and is regulated by bank regulators. [It has] FDIC insurance just like a regular bank.

It is often cheaper working with a local community bank than a national CDFI loan fund. Why? The local bank has insured FDIC deposits.

As for governance, there are a couple of different versions. The depositors vote for the board. There may be a small group of depositors called corporators. There about 450 mutual banks today, concentrated in the Northeast, Ohio, and Illinois, for historical reasons.

They emerged in the late 19th century. Some of the commercial banks even back then were starting to exclude the working-class and poor. A few do-gooder businessmen wanted to do something nice for their workers. Instead of the rich dude becoming the shareholder and reaping the profit, the rich dude can loan the bank its startup capital until it accumulates enough of its retained earnings to pay back the initial shareholder only what they pay in. You give $5 million and get back $5 million.

This was actually a very popular form of bank ownership in the 19th and early 20th century. Lots of mutual banks popped up in Massachusetts, Connecticut, and New York. At one point in places like Massachusetts or Connecticut a majority of their banks were mutual banks. They would fund businesses, real estate, and housing infrastructure.

They’ve stuck around. But new ones are rare. Walden [Mutual] Bank in New Hampshire is the first new mutual bank in 50 years. Part of the reason I wrote The Banks We Deserve was to make readers aware that creating a new community bank remains possible. That option is out there. It is not easy, it is hard. But the option is out there.

SD: You write about the nation’s first bank owned by a Black woman, St. Luke Penny Savings Bank of Richmond, VA, founded by Maggie Lena Walker in 1903 and which continued operating (later as Consolidated Bank and Trust) until 2005. What allowed the bank to succeed for as long as it did, and what led to its merger with a non-Black-owned bank?

OA: Relationships and trust that it built with the community over time. That’s the only thing that explains why community banks survive.

When a city or community or an economy goes through a rough time, all banks will go through a rough time and will have to lose money for a while. If the bank loses money, it has to raise that money from shareholders. If you are in a White middle-class community, you can sell a few extra shares. What happened ultimately is they tried to raise the capital from the community. They couldn’t get enough.

The other option you can do is merge with another bank. That is what happened to Consolidated. It ended up merging with Abigail Adams [National Bank], a women-run bank. But it ended its run as a Black-owned bank.

Their housing crisis hit earlier. That’s what happens in Black communities. The pain hits there first. They couldn’t survive that crisis.

SD: Unsurprisingly, you write a lot about CDFIs. As you know, it’s a complicated story—both one of tremendous expansion and, therefore, the leading exception to the decline of community banking, yet, as you point out, falling in many ways far short of its original vision of supporting historically marginalized communities. How do you assess the CDFI sector’s role in this story?

OA: I think they can lead the charge to create more community banks and credit unions. In Little Rock, Arkansas, People Trust started out as a loan fund, not even a CDFI. They got CDFI certified in 2018.

Ultimately, their founder Arlo Washington realized they needed a banking charter. [They] went for a credit union charter. The deposits would allow them to do more as a loan fund. Consumer loans and other performing loans can come out of the credit union, and the loan fund can focus on the riskier commercial projects the community needs.

Washington saw that was how HOPE Credit Union worked. They have the credit union, and they have the loan fund, and they work together side by side, providing the services the community needs and supporting each other. For example, a construction loan is too risky for the credit union, so the loan fund handles that. Once the building is built, you can refinance with a loan from the credit union side because it has insured deposits, and you can recycle that money into a riskier project.

HOPE didn’t invent that either. They took that idea from Self-Help [Credit Union]. And they took it from ShoreBank. ShoreBank is the granddaddy of them all. They didn’t call themselves a CDFI back then. The fund didn’t exist until 1994. But they had an affiliate loan fund alongside the bank.

By contrast, in North Dakota, the local bank never has to say no, because what happens behind the scenes is the BND provides the part of the loan the local bank can’t provide due to legal lending limits.

Even today, I’m hearing about CDFI loan funds that are going out to get credit union or bank charters. And hearing from credit unions starting loan funds on the side. The combined structure gives each side access to different tools and makes each side stronger.

SD: You write a fair amount about banks that are B Corps [for-benefit companies]. As you point out, there are 16 of these. What lessons do you think the field should take from them?

OA: It’s another source of community. Community can be built around values, not just geography. When Southern Bancorp in Arkansas needed to expand, they went to the B Corporation investors. The point is a source of capital. It is an especially important source of capital that understands the mission of the work—not just looking to make money. If shareholders believe in your mission, you don’t have to deal with their extractive profit investors.

SD: Towards the end of the book, you write about public banks. What is a public bank and what role can they play in rebuilding community-based economies today?

OA: A public bank is a bank owned by a unit of government—could be local, state, or federal. In the prevailing model, most of the deposits also come from a unit of government. The primary model is the Bank of North Dakota (BND) where, since 1919, 90 percent of its deposits come from the state of North Dakota. That is required by law.

What a public bank makes possible for communities are what are known as participation loans. These participation loans help local banks do bigger loans. In any other state, if you’re with a local bank and your business is growing, you’ll eventually run up against the bank’s legal lending limit. By contrast, in North Dakota, the local bank never has to say no, because what happens behind the scenes is the BND provides the part of the loan the local bank can’t provide due to legal lending limits.

This both preserves local banks (rather than forcing mergers) and allows for very responsive community lending. It doesn’t take six months of board meetings and memos to get the BND to support the local lender. It takes a phone call. Maybe an hour or even 10 minutes.

SD: Is there anything else you would like to add?

OA: I love to hear from people. You can reach me at [email protected]. My inbox is always open.