Freedman's Savings Bank on Pennsylvania Avenue in Washington, D.C.

Why America Needs More Black-Owned Banks Now

By Maxwell Chalkin, Chief Digital Officer and Senior Project Manager

In the year 1865, just after the conclusion of the Civil War, Congress chartered the Freedman’s Savings Bank for newly freed ex-slaves. It was a bank founded with the intention of helping newly freed African Americans achieve financial freedom in addition to freedom from the shackles of slavery. The bank was an initial success, attracting many thousands of Black depositors and millions of dollars in deposits, and opening branches across the country.

Freedman’s Savings Bank was run by white men, and Black Americans were denied the right to be involved in the bank’s decision-making. And what did the white men who ran the bank do? They ran it into the ground. Mismanagement, abuse, fraud (one board member even directed bank funds to his family business) and the volatile economic climate of the day resulted in the bank’s failure in 1874.

Tens of thousands of African Americans had put their faith in the Freedman's Savings and Trust Company. When the bank failed, its depositors (who had been misled to think their deposits were guaranteed by the federal government) suffered a catastrophic financial loss. To this day, depositors and their heirs have only recovered about half of the lost deposits.

Trust in the mainstream banking system by Black Americans was shattered; it would be 14 years before another bank catering specifically to the African American community would emerge. But emerge it did, and, this time, the bank—Capital Bank in Washington, D.C.—was organized and operated by African Americans. By 1906, there were 33 Black-owned banks in America, a figure that has ebbed and flowed over the course of time, tracking the fortunes of the economy and banking industry, and the Black constituencies these banks served. In 2010, there were 36 black-owned banks in the U.S. By 2020, that number had dwindled to 21.

Black banks, especially the early ones, were as focused on serving their communities as they were on turning a profit. They encouraged savings, created programs to help the unemployed, offered home loans with atypically favorable terms and lower interest rates and even supported working-class clientele by staying open later for customers who couldn’t leave work to come into the bank.

Over the years, these banks have provided a ticket to upward mobility for generations of Black Americans who were born into a structurally inequitable system. The racial wealth gap in the United States is vast: according to the Brookings Institution, the average American white family has a net worth of $171,000—almost 10 times more than the average Black family. Black communities are more likely to be poor and have underperforming schools, crumbling infrastructure and inferior access to healthcare. These disparities are the direct result of a cycle of Black poverty that started with America’s dark history of slavery and continues to present day.

Among the most flagrant examples of structural financial discrimination is the history of the Federal Housing Administration (FHA) and its legacy of promoting “redlining.” When the FHA was created as part of FDR’s New Deal and the National Housing Act of 1934, its goal was to make home ownership more affordable by insuring mortgages. People of color were intentionally left out to appease Southern Democratic supporters and secure their votes in Congress.

The mechanism of this de facto segregation policy was underwriting standards discouraging home loans in areas “infiltrat[ed]” by “inharmonious racial or nationality groups.” The government provided a thinly veiled racist rationale: the need to protect taxpayers’ investment, and the investments of white homeowners, against the threat Black neighbors would pose to property values.

The FHA went on to develop underwriting standards to help lenders, appraisers and real estate professionals identify high-risk areas the FHA wouldn’t insure. Low-risk neighborhoods were predominantly white communities, and high-risk neighborhoods, outlined in red ink on maps, were minority communities. This practice gave rise to the term “redlining” to describe low-income and minority home seekers’ inability to secure loans because they were “redlined” into high-risk categories.

The FHA also favored new housing in the suburbs over older urban housing, warning that such properties “have a tendency to accelerate the rate of transition to lower class occupancy.” Moreover, it supported segregation in schools and physical barriers like highways to protect neighborhoods from “adverse influences.”

These different forms of redlining methodically cut Black Americans out of the best way American families have had to develop generational wealth: homeownership. Inexpensive, FHA-insured home loans enabled white families to purchase homes in suburban and exurban neighborhoods that ballooned in value over time. These families could make a profit by selling their homes to other white families who also secured competitive mortgages, and they could take cash out of their homes to launch new businesses, renovate their homes or pay for their kids’ educations. And, over time, they could bestow this wealth on their children, and the flywheel repeats.

FHA-insured home loans were not available in urban areas. While white families secured cheap mortgages and moved out of the inner cities to the suburbs, Black Americans had no option but to stay. This drained the value of homes in African American neighborhoods where the residents already lacked access to credit to fix aging homes or invest in new businesses. Even well-off Black families struggled to exit urban neighborhoods. In some white communities, exclusionary zoning, neighborhood covenants and deed restrictions prohibited nonwhite occupants. Meanwhile, lower home values and less wealth meant cities had less to invest in schools and physical and social infrastructure. For decades, the cycle of poverty was reinforced in myriad ways—a cycle that continues today.

It’s undeniable that the last several years have seen America undergo a racial reckoning. Boycotts, protests and other actions against systemic racism have been reverberating around the country, largely in response to high-profile killings of young black men. But systemic racism takes many forms, including financial discrimination and exclusion, the results of which have subjugated generations of black Americans, stymied the development and transfer of family wealth and perpetuated economic disparities that exist to this day.

While Black-owned banks have played and continue to play a vital role incubating and helping grow wealth in Black communities, they simply do not represent a large enough portion of the economy to make a significant difference. Collectively they control just $4.8 billion, less than 1 percent of the nation's banking assets. It is of paramount importance that our local, state and federal governments—and our civic institutions writ large—do a better job of investing in and protecting Black banks and supporting their crucial missions.




MKP communications inc. is a New York City-based communications company specializing in financial services marketing and merger/change communication.