The Viability of Minority-owned Owned Commercial Banks: A Post-2007 Financial Crisis Analysis

• In Event: Issues in Financial Economics

Abstract

The Federal Reserve System through its Minority-Owned Institutions (MOI) Program recognizes the important role that Minority Depository Institutions (MDIs) play in the financial services market by providing access to financial services in markets that have historically been underserved. This study applies a linear regression methodology to investigate interbank differences in 2014 earnings of minority-owned (MDIs) and nonminority-owned (NMDI) banks. Statistical cost accounting models have been used in industry structure for a number of purposes, but not in the context of exploring differences among these two groups of institutions in the post-2007 financial crisis era. In this paper, statistical cost accounting techniques are used to compare the behavior of a sample of MDIs to a matched set of NMDIs in the same zip-code area. The models use least squares regression to relate the composition of a firm’s balance sheet to its earnings. Under strict assumptions, the model can provide estimates of marginal rates of return on individual assets for the two groups of institutions. Past studies suggest that asset and liability composition has typically played a key role in explaining interbank differences in profitability between banks. However, there have been no studies of this type in the aftermath of the 2007 financial crisis. This study uses geographically-matched pairs of MDIs and NMDIs banks to compare differences in their 2014 earnings. The data come from official balance-sheet and income-statements - Federal Financial Institution Reports of Income and Condition (Call Reports) - that all FDIC-insured banks must file with federal regulators. This paper is concerned with the viability of MDIs and focuses on whether there are significant differences between their performance and that of NMDIs. If public policy is geared to providing long term subsidization to MDIs, identifying areas of nonperformance for these institutions would help to formulate more efficient assistance.

Authors

• John E Martinez, Midwestern State University

• Yoshi Fukasawa, Midwestern State University

• Robert C. Forrester, Midwestern State University