Minority Depository Institutions

Walter W. Eubanks
Specialist in Financial Economics

Pauline Smale
Analyst in Financial Economics

Minority depository institutions (MDIs) are a small but important subset of the nation's community banks. MDIs are federally insured depository institutions where 51% or more of the voting stock is owned by minority individuals. The categories of minority depository institutions are Black or African American, Native or Alaskan Native American, Hispanic American, Asian or Pacific Island American, and Multi-Racial American. For the purposes of determining minority ownership, the institution's voting stock must be held by U.S. citizens or permanent legal U.S. residents. In addition, institutions will be considered MDIs if a majority of the Board of Directors is minority and the community served by the institution is predominantly minority.

Measured by total numbers, MDIs have historically remained a relatively small part of the American banking system but these institutions have long been recognized for the role they play in serving the financial needs of communities that are underserved by other financial institutions. Major banking reform law (P.L. 101-73), enacted in 1989 in response to the financial problems created by the savings and loan institution crisis in the 1980s, addressed the need to preserve and encourage minority ownership of depository financial institutions. The Financial Institution Reform, Recovery, and Enforcement Act of 1989 (FIRREA, P.L. 101-73) identified goals and required federal financial regulatory agencies to determine the best methods to accomplish these goals. The agencies were directed to provide training, technical assistance, and educational programs. During the years following the enactment of FIRREA, the financial performance of MDIs (as a group) has continued to lag behind that of non-minority institutions. Federal bank regulators have been criticized on the effectiveness of their support efforts. During oversight hearings in 2007, Congress encouraged a recommitment of effort by the banking regulators to the goals for MDIs set by FIRREA. Since the hearing, there is some evidence to suggest that the regulators have contributed to reducing the full impact of the financial turmoil on minority banks.

Like all depository financial institutions, MDIs provide credit and financial services (including loans, checking and savings accounts, and investment options) to their communities. MDIs serve both urban and rural populations and generally operate in communities that are challenged with demographic and economic weaknesses. MDIs can have difficulty raising capital. The cost of providing banking services in lower income communities can be higher because the deposit base is frequently unstable. Customer deposits are usually small to begin with and subject to high turnover. In addition, in the case of immigrant communities, the population can be highly mobile. For these and other reasons, MDIs usually carry higher reserves than their peers, which in turn limits their lending capabilities.

The ongoing struggles of MDIs have been compounded by the current financial crisis and economic recession, which has challenged all depository financial institutions. Federal regulators have worked to improve their outreach to minority banks. They are taking steps to address both old and new challenges to MDIs, recognizing that in the current economic climate these institutions can help revitalize the communities they serve by providing much needed credit and financial services to small businesses and consumers.

This report will be updated as developments warrant. 

Date of Report: January 29, 2010
Number of Pages: 15
Order Number: R41052
Price: $29.95

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