Urban Wire Building Trust in the Financial System Is Key to Closing the Racial Wealth Gap
Amalie Zinn, Michael Neal, Vanessa G. Perry
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Since the racial reckoning following George Floyd’s murder, many banks have pledged to uplift the Black community. Some have initiated or supported programs to close the racial wealth gap, but these initiatives often fail to account for the fact that historically racist financial policies have eroded Black communities’ trust in banks. Even regulators recognize the role of trust; the Office of the Comptroller of the Currency recently announced a plan for an annual survey on public trust in banking and bank supervision.

Given the history of banking in the United States—which was created when slavery was still legal, deliberately excluded Black Americans for a century, and then employed discriminatory practices such as redlining and subprime lending—it is not surprising that many Black Americans are hesitant to engage with banks. For Juneteenth and National Homeownership Month, we share how a trust barrier separates Black people from banks and their wealth-building services. We offer evidence-based strategies banks can strengthen or adopt to build trust with Black Americans, both to improve financial outcomes for Black communities and to ensure the depository system is equitable and sustainable.

Throughout the piece, there are quotations that one of our coauthors, Dr. Vanessa Perry, has collected from multiple generations of friends and family to show just how much this history affects real people’s lives. Their names have been changed to protect their identities.

The banking system was built to exclude Black people

Depository institutions were established in the early 1800s to stabilize the fledgling economy and to provide a secure vehicle for savings. At the time, most Black people in the South were still enslaved, while Black people in the North faced discrimination in labor markets, public education, and voting, and they were barred from owning property. As a result, Black people lacked access to formal banking services when banks were created. Once slavery was made illegal and Black people had deposits and savings, they relied for decades on alternative service providers in their communities, like Black churches and Black-owned insurance companies.

“Black people went to loan companies for loans. They weren't told the interest rate. These were handshake transactions; there was rarely any paperwork. There were no bank loans.”

– Vernon, 92, Savannah, Georgia

The way banks operated also made it difficult for Black people to access them. Initially, “bankers’ hours” were from 9:00 a.m. to 2:00 p.m. on weekdays, with some offering extended hours on Fridays. This was a major constraint for people who worked in jobs with little or no flexibility, particularly because banks were seldom located in or near Black communities. Today, digitalization has expanded bank access, but Black households are less likely to have internet service and thus face disproportionate barriers to mainstream banking.

“I worked hard and sweat for this money and I don’t want to let it out of my hands. Plus, I needed my money when I needed it.” 

– Kevin, 89, Washington, DC

As another example, homeownership programs established in the New Deal, which transformed America’s banking and credit markets, were administered in ways that excluded people and communities of color. The most well-known example, redlining, relied on maps primarily based on racial makeup to determine neighborhood-level risk for home loans developed by the Home Owners’ Loan Corporation and used by the Federal Housing Administration. These practices have not stayed in the past; high-profile lawsuits over redlining are under way in 2023.

When Black people participated in mainstream banking, they were harmed

Banking was based on long-standing, often multigenerational customer relationships, but the prevalence of racism and segregation in every aspect of American life meant Black people couldn’t build these relationships.

Federal laws did not begin to prohibit discrimination in the financing of housing until the Fair Housing Act of 1968. Four years prior, the Civil Rights Act of 1964 prohibited racial discrimination in certain business sectors, but banking wasn’t one of them. The Fair Access to Banking Act, recently reintroduced in Congress after failing in 2021, intends to expand the Civil Rights Act to include banking.

“Every institution and aspect of society was segregated. Mom couldn’t try on a hat at the department store because of her race. Why would people then turn their money over to White bankers who mistreated them in every other context?” 

– Polly, 65, Washington, DC

The Freedman’s Savings Bank is one historical example of the harm the banking system has inflicted on Black communities. Congress set up the Freedman’s Savings and Trust Company, a savings bank for formerly enslaved Black Americans, in 1865. In 1874, after the institution invested depositors’ money into risky railroad companies and real estate, the bank collapsed. When the bank was shut down, the nearly 60,000 depositors faced about $3 million in losses. Because federal deposit insurance did not yet exist, the decades-long fight in Congress to return those lost funds to depositors failed.

When Black families have been able to obtain mortgages through mainstream financial institutions, lenders have steered many of them toward unsustainable products. Leading up to the Great Recession in 2008, Black borrowers were issued a disproportionately high number of predatory and subprime loans. As a result, roughly 30 percent of Black borrowers’ homes went into foreclosure, compared with 11 percent for white households.

The exclusion of Black people from mainstream banking also limits their access to safe capital. With the Paycheck Protection Program, implemented during the COVID-19 pandemic to aid small businesses, banks and credit unions passed program funds through to businesses. Recent research has found that predominantly Black neighborhoods had lower take-up of these loans, despite being disproportionately affected by the pandemic, at least partly because of a lack of access to Paycheck Protection Program lenders.

Public confidence in the nation’s financial system is critical to its functioning

As recently as 2019, 13.8 percent of Black households and 12.2 percent of Hispanic households did not have a checking or savings account at a bank or credit union, compared with only 2.5 percent of white households. Many Black and Hispanic people cited mistrust of banks as their reasoning. A lack of access to these mainstream banking systems, which are the foundation for wealth building, has led Black people to have significantly lower net worth and homeownership rates than their white counterparts, on average, at every stage of their lives.

“They only reach out to us when it benefits them….They only offered Black people loans in certain areas and they would only lend you a small amount.”

– Anna, 78, Detroit, Michigan

The lack of trust is a concern to the broader banking system. Following the Great Depression, Congress created the Federal Deposit Insurance Corporation—the organization that insures deposits and supervises depository institutions for safety, soundness, and consumer protection—to restore “public confidence in the nation’s financial system.” Though the “public” may have been overwhelmingly white in the 1930s, that’s less true today; projections suggest that the share of the US population that is Black will grow significantly in the coming decades. When people do not trust banks, it can lead to lower profitability for banks and, ultimately, bank runs and failures. For mainstream banks to stay “mainstream,” they need to build trust with Black people, particularly as the Black community grows. 

For the financial system to be equitable and sustainable, banks must gain Black Americans’ trust

Recent bank-supported programs, such as special purpose credit programs and targeted down payment assistance (PDF), are a welcome first step toward addressing the wealth inequities that banks helped establish. But going beyond new programs to build trust is a more comprehensive response to the wealth inequities Black communities experience. Adopting or deepening the following strategies can improve the efficacy of banks’ ongoing and new equity work:

  • Grow partnerships with minority depository institutions. State and federal regulators can continue to help foster these partnerships. The proposed reforms for the Community Reinvestment Act include incentives for ventures between mainstream banks and minority depository institutions and community development financial institutions.
  • Continue to seek balanced relationships with other trusted organizations and with Black communities. Organizations might include churches or other nonprofits working to support Black neighborhoods.
  • Prioritize greater diversity at all staff levels. From the most junior to the most senior roles, hiring and promoting Black staff members could help banks build trust with Black communities.
  • Collect and share data on program participation and outcomes. Diligently collecting data on who their programs serve can help banks determine what works and where more effort is needed. When programs produce real impact, banks could share their work and methods so other institutions can learn. To encourage banks to hold themselves accountable, regulators—like the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, who already survey the public—could survey their member banks regularly and publish results on their programs, methods, challenges, and successes. More available data on what works—and what doesn’t—can help showcase and promote successful strategies.

Institutions that are serious about their equity initiatives should work to build trust with Black people and address past and current harms. Closing this trust gap built on generations of wrongdoing will not be instantaneous, but over the long term, closing the gap can boost the impact of depository institutions’ equity programs, ensure banks’ overall sustainability and profitability, improve Black communities’ financial health, and ultimately help close the racial wealth gap.


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Research Areas Wealth and financial well-being
Tags Black/African American communities Community and economic development Economic well-being Financial knowledge and capability Homeownership Inequality and mobility Racial and ethnic disparities Racial homeownership gap Racial inequities in economic mobility Structural racism Wealth gap
Policy Centers Housing Finance Policy Center
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