Building Trust in the Financial System is Key to Closing the Racial Wealth Gap

Since the racial reckoning following the death of George Floyd, many banks have pledged to uplift and support the black community. Some have initiated or supported programs to close the racialwealth 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.

Given the history of banking in the United States–which was created when slavery was still legal, excluded blacks for a century, and the employed discriminatory practices such as redlining and subprime lending–it’s not suprising that many black Americans are hesitant to engage with banks. For Juneteenth and National Homeownership Month, we all share how a trust barrier separates blacks from banks and their wealth-building services.

Note: The banking system was built to exclude African Americans.

Depository institutions were established in the 1800’s to stabilize the fledgling economy and provide a secure vehicle for savings. At the time, most blacks in the South were still enslaved, while those in the North faced discrimination in the labor world, public education and voting, and they were barred from owning property. As a result, African Americans lacked access to formal banking services when banks were created. Once slavery was abolished, blacks relied on for decades on alternative services providers in their commiunities, like black churches and black-owned insurance companies.

The way banks operated also made it difficult for blacks to access them. Initially, “bank hours” were from 9:00 am to 2:00pm on weekdays, with some offering extended hours on Fridays. Today, the digitalization has expanded bank access, but black households are less likely to have internet service and face barriers to mainstream banking.

As another example, homeownership programs established in the New Deal were administered in ways that excluded people of color. The most well known, redlining, relied on maps primarily based on racial make up to determine neighborhood-level risk for home loans developed by the Home Owners Loan Corporation and used by the Federal Housing Administration.

As recent as 2019, 13.8%of black households and 12.2% of Hispanic households did not have a checking or savings account at a bank or credit union, compared with only 2.5% of white households. Many African Americans and I Hispanics cited mistrust of banks as their reasoning. A lack of access to mainstream banking systems, which are the foundations of wealth building, has led blacks to have lower net worth and homeownership rates than whites counterparts, on average, at every stage of their lives.

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