Federal regulators methods for examining how the largest banks deliver financial services to communities throughout the Chicago region is inconsistent and incomplete, says a new report by Woodstock Institute. The availability of appropriate and fairly priced financial services are critical for helping lower-income people enter the financial mainstream. This neglect harms the financially underserved.
Looking at recent bank examinations, Woodstock Institute researchers tried to determine how federal examiners evaluated the distribution of bank branches and the quality and relative affordability of basic financial services, such as checking accounts. They found glaring omissions, inconsistent evaluation methods, and in some cases, little more than cursory praise of the banks modest effort. Geoff Smith, research director described the exams as plagued by insufficient quantitative data, superficial and inconsistent qualitative data, and a lack of performance driven measurements.
The Community Reinvestment Act, which authorizes Federal examiners to evaluate the performance of financial institutions in lower-income communities, has resulted in detailed information on mortgage and small business lending patterns but far too little on another critical component of community reinvestmentfinancial services. In the past, researchers, community groups, and practitioners have criticized the implementation of the test for its vagaries and proposed several reforms designed to hold the largest banks accountable. At the same time, they continue to provide incontrovertible evidence that lower-income communities have not shared in the recent bank building boom, despite the relatively high aggregate income available for deposit. Moreover, banks are not competing effectively against high-priced financial service providers such as check cashers in those neighborhoods.
Woodstock Institute and others have called on federal regulators to supplement data on how bank branches are distributed, with data on how they perform in reaching out to lower-income neighborhoods with appropriate and affordable financial services. All of this data is currently available to bank examiners, but the fact that it has been only sporadically reported publicly, substantially limiting its usefulness. Such data must be collected in a standardized manner and reported for every institution examined. The absence of such data from the majority of examinations reflects an institutional unwillingness on the part of the bank regulators to take the service test seriously despite the Congressional mandate.
The implementation of the service test needs major improvements before the test can capture the reality of an institutions delivery of banking services to lower-income people and communities. The following changes would allow the test to more effectively measure a banks performance and should be reported in the performance evaluation:
1. Branch distribution should be measured in a consistent manner against the percent of households living in low-and moderate income neighborhoods in the banks assessment area.
2. Standardized data on new and existing retail checking and savings accounts should be collected and analyzed by regulatory agencies. These data should include information on account holder census tract, year opened, and average annual balance.
3. Examiners should institute a systematic analysis of the full cost of retail products such as checking accounts which will allow for comparisons among institutions.
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Woodstock Institute, founded in 1973, is a nationally-recognized resource on credit and capital needs of low-income and minority communities. The Institute engages in applied research, policy development, and technical assistance to promote community economic development.