Throughout my career, including my time as Brooklyn Park mayor, my primary focus has been on narrowing the gaps in economic opportunities that marginalized communities face. Owning your own home or starting your own business has always been a part of the American dream, and everyone deserves access to those opportunities.
That’s why I was troubled to hear about a well-intentioned, yet misguided proposal being considered by the Federal Reserve, which seeks to raise capital requirements for banks. I respect the proposal’s sentiment, but its focus is misplaced, and its unintended consequences would worsen the problems that aspiring homeowners or hard-working entrepreneurs already face, especially those in communities of color.
The Federal Reserve’s proposal is a cure for an illness that our banking system does not have. Thanks to legislative action taken by lawmakers after the 2008 financial crisis, otherwise known as the Dodd-Frank Act, as well as the leadership of financial regulators, our nation’s major banks have equipped themselves with enough capital on hand to weather the most turbulent of economic storms.
We saw that during the pandemic our nation’s economy endured the unprecedented difficulties caused by COVID-19 better than any other economy in the world. Our brightest financial minds have also acknowledged the resiliency of our banks, including Federal Reserve Chair Jerome Powell, who stated, “The banking system is very strong, well-capitalized [and] highly liquid.”
The proposal is particularly problematic when you consider the unintended consequences to homebuyers and small business owners. Low- and moderate-income families face immense challenges in finding safe and affordable places to live. Any increase in capital requirements for banks, especially one as significant as the one being considered, would inevitably lead to a reduction in the availability of mortgage loans.
This would make it even more difficult for aspiring homeowners to secure financing for their homes. It would also create an added burden for small business owners, hindering their ability to access the capital needed to grow their company and recover from the pandemic. Small businesses are the backbone of our economy. Given their recent challenges, regulators should aim to stabilize this sector, not cause unneeded harm.
Families in my community already have difficulty accessing credit. The proposed actions by the Federal Reserve will make the situation worse, especially for Black Americans seeking to buy a home.
A recent study reflected the racial disparity that the new rules would have on borrowers. The risk weighting for low down payment mortgages for Black borrowers would go up almost 12 percentage points, compared to just 4.8 percentage points for their White counterparts.
In simpler terms, the same communities who have faced decades of redlining and discriminatory lending practices would once again find it more difficult to obtain consistent access to the financial services that are needed to pursue their dream of home ownership.
Entrepreneurs in my community would face a similar squeeze. Language in the Federal Reserve’s proposal would lock out many small businesses from accessing bank credit under the best terms. It would increase the costs of borrowing and decrease availability for small business owners. In a recent study, 84 percent of small businesses shared that if the Federal Reserve were to go through with this proposal, it would make it challenging to access capital they need to thrive in an already difficult market.
In 2023 we shouldn’t be establishing rules that so clearly worsen the troubling racial disparities that have historically plagued our country. The Biden administration has done deeply impactful work to reduce costs and advance racial equity. It’s pivotal that we don’t enact rules on the financial system that would undermine that progress.
When considering whether to move forward with this proposal, it is essential that decision-makers understand how these rules would inadvertently widen the racial gaps that exist when it comes to economic opportunity.
If you or someone you know would like to provide feedback, the public comment period is currently open. You can write Senator Klobuchar and Senator Smith so that your voice is heard on this issue.
Hollies Winston is the first Black mayor of Brooklyn Park, the sixth largest city in Minnesota. He is also the owner of Guaranteed America, LLC and a 2013 MBA graduate of the University of Minnesota’s Carlson School of Management.