Jamie Dimon's testimony before Congress serves as a stark reminder of the hubris and fallibility at even the most elite financial institutions, and provides an alarming illustration of a system where banks are addicted to big bets. Dimon has called the trading that led to gigantic losses at JPMorgan Chase a "stupid" mistake. It's far from the only stupid mistake being made in the banking industry. At the same time commercial banks are taking these risks, they are increasingly pulling out of low- and moderate-income communities by closing branches. It's a trend that's bad for communities and families, bad for the banks, and bad for America.
These banks are not meant to be casinos, where gamblers can hit a big jackpot or lose it all with risky "London whale"-style trades. This is why the National Community Reinvestment Coalition, of which I am president and CEO, opposed the repeal of the Glass-Steagall Act, and supports the implementation of a strong Volcker rule, among other regulatory measures. These banks are meant to serve communities, and provide honest, legitimate and fair products that allow families and businesses to thrive and build wealth. And the numbers show that they are closing branches to the detriment of low- and moderate-income communities.
In our recent report on bank branch closures, the National Community Reinvestment Coalition calculated that from 2007 to 2010, the number of bank and credit union branches increased by 1,000 in middle- and upper-income neighborhoods, while decreasing by 530 in low- and moderate-income neighborhoods across the country. When bank branches close in poor neighborhoods, they are replaced by fringe institutions such as abusive payday lenders and check cashers, which charge exorbitant interest rates and fees for services that were provided more affordably by banks. In contrast to the wealth creation promoted by bank branches, fringe lenders perpetrate wealth extraction from low- and moderate-income communities. Considering that a single consumer can lose hundreds or thousands of dollars paying excessive fees and interest to payday lenders and other fringe financial institutions, the impact on neighborhood wealth can be devastating.
Disparities are likewise dramatic by race of neighborhood. In predominantly white neighborhoods (where only 10 to 19 percent of the residents are minorities), NCRC estimates there was one bank branch for every 2,037 people, but one payday lender for every 42,668 people. By comparison, in predominantly minority neighborhoods (80 to 100 percent minority), there was one branch for every 7,059 people and one payday lender for every 6,413 people. There was more access to payday lenders than branches in the predominantly minority neighborhoods, while the opposite was the case in predominantly white neighborhoods.
A bank executive was recently quoted in an American Banker article as saying, "The next frontier would be much fewer branches." Jamie Dimon himself claimed at a recent shareholder meeting that Dodd-Frank, and particularly the Durbin Amendment, "change[d] the possibility of certain types of branches." With this claim Dimon impressively manages to both criticize Dodd-Frank, and scapegoat it for the closure of bank branches. Ultimately, this argument does not hold water given the fact that branches in low- and moderate-income areas can still be profitable for banks.
The decision to close bank branches hurts this country. If banks are remiss to do what is sensible and right of their own volition, then it means lawmakers must step in to induce them to do so. Here are some steps Congress should take today:
Provide better data on the demographics of bank branch customers. This requirement was in early versions of Dodd-Frank but was stripped out at the last minute. Publicly available loan data by race, gender, and income has kept lending institutions accountable for maintaining and growing the number of branches in poor neighborhoods as well as increasing responsible and prime home loans to minorities, women, and modest income borrowers.
Strengthen the Community Reinvestment Act service test. The service test on CRA exams scrutinizes the level of bank branches and services to low- and moderate- income borrowers and communities but often inflates results, according to a University of North Carolina study. For example, one of the regulatory agencies, the Office of the Comptroller of the Currency, considers branches as far as one mile away to be accessible to the low-and moderate-income for purposes of the CRA exam.
Make access to bank branches and lending part of HUD's Analyses of Impediments. The Department of Housing and Urban Development (HUD) requires jurisdictions participating in HUD programs to analyze impediments to choice in housing. These analyses often include an analysis of Home Mortgage Disclosure Act (HMDA) data. HUD should require an analysis of HMDA and branch data as part of these analyses.
Apply CRA to mainstream credit unions. The number of branches in low-income neighborhoods declined 1 and 8 percent for banks and credit unions, respectively, from 2007 through 2010. The number of bank branches in moderate-income neighborhoods declined 1 and 13 percent for banks and credit unions, respectively, during the same time period. Credit unions were more apt to retreat from modest income neighborhoods during the recession, in part, because banks have CRA obligations whereas credit unions do not. It is long past time for credit unions to have the same CRA obligations as banks.
These are sensible prescriptions to encourage banks to invest in our communities, and to avoid a future where access to a bank is a luxury afforded primarily to the rich. There is something wrong with the picture when banks make huge gambles with reckless abandon, putting our whole economy at risk, and simultaneously recklessly abandon the very communities they are intended to serve by closing branches in low and middle-income communities.
It is in everyone's interest to ensure that we have an active financial services sector in low- and moderate-income communities, and to ensure that they provide safe and sustainable loans and products. The reason why the government stands behind the banks and insures them is because they are integral to our communities' growth and progress. If the banks turn their back on those communities, they have gotten away from their core purpose and do us all a grave disservice. There is no doubt that pushing for stronger regulation is an uphill battle, particularly considering the power and influence of financial institutions. But this newfound reminder of very real fallibility and irresponsibility in the industry should help get the ball rolling.