Color and credit: Race, regulation, and the quality of financial services

Begley, Taylor A.; Purnanandam, Amiyatosh

doi:10.1016/j.jfineco.2021.03.001

Cited by 68 publications

(15 citation statements)

References 24 publications

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“…More broadly, we contribute to the understanding of racial disparities in access to financial services. This literature has mainly studied residential mortgage and consumer credit markets (Tootell, 1996;Bayer et al, 2018;Dobbie et al, 2020;Bhutta and Hizmo, 2021;Ambrose et al, 2020;Giacoletti et al, 2021;Begley and Purnanandam, 2021;Blattner and Nelson, 2021). While there is extensive work on bias against Black people across a wide variety of settings (e.g., Arnold et al, 2018;Bertrand and Mullainathan, 2004;Knowles et al, 2001;Anwar and Fang, 2006;Price and Wolfers, 2010), there is less work on discrimination against Black business owners.…”

mentioning

confidence: 99%

Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program

Howell¹,

Kuchler²,

Snitkof³

et al. 2021

SSRN Journal

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We explore the sources of racial disparities in small business lending by studying the $806 billion Paycheck Protection Program (PPP), which was designed to support small business jobs during the COVID-19 pandemic. PPP loans were administered by private lenders but federally guaranteed, largely eliminating unobservable credit risk as a factor in explaining differential lending by race. We document that even after controlling for a firm's zip code, industry, loan size, PPP approval date, and other characteristics, Black-owned businesses were 12.1 percentage points (70% of the mean) more likely to obtain their PPP loan from a fintech lender than a traditional bank. Among conventional lenders, smaller banks were much less likely to lend to Black-owned firms, while the Top-4 banks exhibited little to no disparity after including controls. We use novel data to show that the disparity is not primarily explained by differences in pre-existing bank or credit relationships, firm financial positions, fintech affinity, or borrower application behavior. In contrast, we document that Black-owned businesses' higher rate of borrowing from fintechs compared to smaller banks is particularly large in places with high racial animus, pointing to a potential role for discrimination in explaining some of the racial disparities in small business lending. We find evidence that when small banks automate their lending processes, and thus reduce human involvement in the loan origination process, their rate of PPP lending to Blackowned businesses increases, with larger effects in places with more racial animus.

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mentioning

confidence: 99%

Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program

Howell¹,

Kuchler²,

Snitkof³

et al. 2021

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…Research documents contemporary examples of disparate impacts on poor white and racially marginalized groups, such as how banks tend to avoid opening branches in communities with higher percentages of poor and/or Black and Brown residents (Faber 2019;Fowler, Cover, and garshick Kleit 2014;goodstein and Rhine 2017;Smith, Smith, and Wackes 2008). Moreover, research indicates that banks extend less credit and higher-cost credit (Begley and Purnanandam 2020;Massey et al 2016;Rothstein 2017) and charge higher fees on retail account products (Campbell, Martínez-Jerez, and Tufano 2012;Caplovitz 1968;Servon 2017) to poor white and Black and Brown customers. Oftentimes, researchers trace disparate impacts to bank employees who decided which customers were worthy of responsible banking and raised the costs for marginalized groups (Massey et al 2016;Servon 2017).…”

Section: Literature Reviewmentioning

confidence: 99%

Doubling Down on Racial Capitalism during COVID-19: Qualitative Interviews with Bank Employees

Friedline¹,

Wood²,

Wheatley³

et al. 2021

The ANNALS of the American Academy of Political and Social Scie

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The COVID-19 Pandemic Recession has revealed examples of systematic discrimination within a wide range of industries, including banking. Using data from interviews conducted with bank employees in March and April 2020, we explore how private banks exemplify racialized organizations and operate within the broader economic system of racial capitalism that prioritizes pursuit of profits over the interests of their customers. We explain how the banking industry’s responses to the pandemic reflect the logic of racial capitalism, and we develop the theme of doubling down to illustrate this logic and to explain the patterns revealed in employees’ narratives. Subthemes included pursuit of profits, bureaucratic mundane, forced choices, history limits imagination, and dissonance. We conclude with implications for the banking industry.

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“…We find that the estimated coefficient on GSS Trust 2010 is fairly stable across these specifications. These demographic variables could also be related to consumer sophistication (see, e.g., Hall and Woodward [2012], Gurun, Stoffman, and Yonker [2017], Egan, Matvos, and Seru [2019]) or to predatory bank behavior (Begley and Purnanandam [2018]); however, none of them correlates significantly with the number of meritorious complaints. In the online appendix (appendix table IA.1, panel A), we confirm that the negative and significant correlation between complaints and trust is also robust to (1) the state's political orientation (using the presidential election results from 2008 or 2012) and (2) a financial literacy score derived from the National Financial Capability Study (NFCS).…”

Section: Local Culture and Consumer Complaintsmentioning

confidence: 99%

Voice of the Customers: Local Trust Culture and Consumer Complaints to the CFPB

Hayes

Jiang

Pan

2021

J of Accounting Research

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We use complaints filed with the Consumer Financial Protection Bureau (CFPB) to study the interplay between social norms and the effectiveness of consumer protection laws. We find that a higher level of trust in a given location is associated with a lower number of complaints filed against financial institutions in that location. Employing a difference-in-differences approach, we further find that, after the establishment of the CFPB, banks in low-trust areas reduce fees charged to consumers more compared to banks in hightrust areas. Our results suggest that the threat of consumer complaints to a government agency affects how banks treat their customers, and they shed

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Color and credit: Race, regulation, and the quality of financial services

Cited by 68 publications

References 24 publications

Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program

Racial Disparities in Access to Small Business Credit: Evidence from the Paycheck Protection Program

Doubling Down on Racial Capitalism during COVID-19: Qualitative Interviews with Bank Employees

Voice of the Customers: Local Trust Culture and Consumer Complaints to the CFPB

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