America’s segregated banking

This is an audio transcript of the FT News Briefing podcast episode: America’s segregated banking

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, December 22nd, and this is your FT News Briefing.

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As Chinese listings vanish from US stock markets, the country’s exchanges are searching elsewhere for new revenues. And the Turkish lira has spent most of the year in freefall. But yesterday Turkey’s president sent the currency soaring. Plus, banks in the US have been saying they want to help black business owners, but are they making a positive contribution?

Imani Moise
All the banks are paying lip service to it, but at the same time they don’t want to widen their credit box or lower their credit standards.

Marc Filippino
I’ll talk with the FT’s US banking correspondent Imani Moise about why it’s so hard to change America’s segregated banking sector.

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I’m Marc Filippino, and here’s the news you need to start your day.

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Chinese companies are leaving US stock markets because of political tension between Washington and Beijing. Now, US stock exchanges want to replace the lost revenue of those IPOs. The FT reports that the Nasdaq and New York Stock Exchange are eyeing India and south-east Asia and other Asian countries as sources for future IPOs. One Nasdaq executive said the pipeline of companies in Asia had grown into a few dozen, but it’ll be tough to replace all the revenues generated by lucrative and abundant Chinese listings, which this year outnumbered the IPOs for the whole Asia-Pacific region over the past decade.

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Turkey has made headlines for its interest rate cuts despite other central banks raising rates and despite severe inflation in Turkey. Now those Turkish rate cuts have demolished the country’s currency, the lira. But yesterday, President Recep Tayyip Erdogan pulled a rabbit out of his hat. He announced a new savings scheme to boost the lira by encouraging Turks to hold more of their savings in the currency.

Laura Pitel
This is something that Turks have not been very keen to do because the banks have effectively been offering them negative real interest rates.

Marc Filippino
That’s the FT’s Turkey correspondent Laura Pitel. After Erdogan announced the plan, Turkey’s lira reversed course and surged.

Laura Pitel
Turks have mainly been seeking to protect their savings by saving in dollars and gold. Erdogan has now basically launched a state-subsidised scheme that will guarantee the value of their savings even if the lira weakens against the dollar. The state will subsidise the gap between inflation rate and the exchange rate. This is being greeted with some excitement by the markets. I should say that also that I’m hearing claims from my contacts in the banking and finance world that Turkey’s central bank has also been intervening in the markets, is selling dollars, trying to put the currency, I think, they might have been trying to sort of window dress the news a little bit. But it seems that also it has supported the lira, you know, some people might decide to take up this offer, and that could help to strengthen the lira, at least for the time being.

Marc Filippino
And economists say the scheme doesn’t really address the big problem in Turkey’s economy, which is inflation. It could even fuel more inflation. Economists call this move by Erdogan a backdoor rate hike that could create other risks.

Laura Pitel
Because the state is effectively offering to subsidise people’s savings, it’s going to increase the burden on the public finances. Turkey, in general, has pretty strong public finances, especially compared to other emerging markets. It’s always been like a pillar of strength for the Erdogan government and its economic management. But over the last few years, they’ve taken on more and more foreign currency-denominated debts, which means that every time the lira slides, the debt burden of the government becomes more expensive to service. And then if we have the government subsidising the interest effectively on, on people’s savings accounts, if a lot of people take up this offer and the lira slides further against the dollar, the government will be left with quite a large bill to pay and that will decrease its room for manoeuvre in times of fiscal spending. It will increase its debt burden, and so that’s something that people are going to be watching quite closely.

Marc Filippino
Laura Pitel is the FT’s Turkey correspondent.

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The police murder of George Floyd last year sparked a renewed focus on racial inequality, and that includes financial inequality. So banks pledged billions in credit and other forms of aid to try and help communities of colour. This is after years of avoiding African-American borrowers. To find out what, if anything, has changed, I’m joined by the FT’s US banking correspondent Imani Moise. Hey, Imani.

Imani Moise
Hi, Marc.

Marc Filippino
So Amani, you’ve been talking to black American entrepreneurs about their experiences trying to get loans from banks so they can start businesses. Can you tell us about a person that, that stuck out to you?

Imani Moise
One who definitely stands out is Jessie Hayes. I talked to her while reporting in Detroit, and she owns a skin bar called Skinphorea. But while she was trying to get her first location, she told me that she went to 19 different lenders. So that would be the big banks, also credit unions, and she was unfortunately turned down each time, and even still, as she kind of proved her business and was trying to open a second location because her first location was so successful, she said she kind of found a similar fate and was still not able to get mainstream lending, which shocked me.

Marc Filippino
So Imani, is this just, you know, straight-up racism or is it the fact that a lot of banks don’t see black businesses in black communities as being profitable? Is it a little bit of both? What is it?

Imani Moise
I think it’s definitely hard to say, just because there’s so many compounding factors. So, for example, a lot of black-owned businesses, they tend to be on the smaller side and banks, they do specialise in higher-dollar loans. So I think just by, as a consequence of that, a lot of black entrepreneurs don’t necessarily fit into the mainstream banking system. When it comes to the kind of the cookie-cutter entrepreneur that they’re looking for, however, you do see other entrepreneurs that do have an easier time getting early-stage funding than black entrepreneurs so I would say race is certainly a factor. Another thing is that when it comes to that early-stage funding, most black entrepreneurs are self-funded, but a lot of entrepreneurs are self-funded, particularly at those early stages. But because black entrepreneurs are more likely to be low-income, they are less likely to get kind of the angel investors or to have the non-bank networks to tap for funding in the early stages.

Marc Filippino
So in your article, Imani, you explain that many banks, instead of lending directly to black entrepreneurs, they go through something called CDFI that stands for community development financial institutions. Why do banks prefer to go that route?

Imani Moise
Yeah, I think that was really interesting to me as I was hearing about all of the pledges to increase lending to minority communities after George Floyd is that so much of this was being done through CDFIs. And what happens is banks lend to CDFIs between like 2 and 3 per cent. And what they tell me is that CDFIs have a track record of working with low-income communities and minority communities in particular. They know those communities better and also CDFIs have what they call technical assistance, which is a lot more hand-holding than banks are used to doing with their borrowers. So technical assistance is they’ll look over your business plan. They’ll tell you that maybe you need to tweak your marketing budget or your marketing strategy. So banks say CDFIs make sense as partners to entrepreneurs who may have a harder time being successful.

Marc Filippino
So on paper, it sounds like a pretty good match. Why aren’t they able to level the playing field more for entrepreneurs of colour?

Imani Moise
Well, when you talk to the CDFIs, they say that they want more funding and they want cheaper funding because if they get cheaper funding, they are able to extend loans for, to entrepreneurs at lower interest rates. They also want more grants. Grants also lower their cost of funding because grants also would enable them to invest in their own infrastructure. So I think what’s really interesting is, according to Treasury department data, the average headcount at these CDFIs is six people. Right? So you have six people at these non-profit lenders responsible for deploying millions of capital. They also don’t have the tech budgets as a JPMorgan or a Bank of America. So I think CDFIs are definitely a valuable player in the ecosystem, but unfortunately, they’ve been historically underinvested in. And as a consequence, low-income and minority entrepreneurs have also been underinvested in.

Marc Filippino
Are there any banks out there who see black business owners as a market opportunity?

Imani Moise
I think it’s hard to say. I think every single bank that I talked to, they want to address these lending disparities. But I think some of the things that I talked about earlier when it comes to the loan sizes or credit history or the availability of documents make it hard to make those loans from a regulatory standpoint because they can only take on so much risk. So I think all the banks are paying lip service to it, but at the same time, they don’t want to widen their credit box or lower their credit standards. It’s hard to pinpoint a bank who is really putting their capital where their mouth is besides just lending to CDFIs.

Marc Filippino
Imani Moise is the FT’s US banking correspondent. Thanks, Imani.

Imani Moise
Thanks, Marc.

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Marc Filippino
Before we go, China’s property sector is losing its appeal as growth slows and the government cracks down on speculation. So people are looking for other things that will hold value over time. They may have found something. The FT reports a 40 per cent surge in China’s imports of Swiss watches in the first 10 months of this year. Several watch resellers told the FT that business has taken off in recent months, while the Chinese people stopped buying additional homes, and instead they’re spending their extra cash on Rolexes, Patek Philippe and other high-end timepieces.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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