Credit and Banking Structure: Asian and African-American Experience in Los Angeles

Abstract

This paper considers whether the paucity of bank branches in heavily African-American communities and the lack of a robust AfricanAmerican banking sector may be among the factors impeding these communities' economic development. While activists often claim that these factors reduce credit flows in African-American communities, there are reasons to think that such claims may lack merit. For one thing, technological advances have permitted banks to make loans geographically distant from their branch offices and also have allowed many nonbanks to enter credit markets. Further, many immigrants, especially from East Asia, have succeeded on the basis of informal financial arrangements nurtured in ethnic enclaves. Therefore, informal intraethnic resources, not banks per se, may be the key to ethnic groups' access to credit and capital. Ethnic enclaves are of undoubted historical importance for many ethnic groups, but they may no longer be an important forn of social organization (Roger Waldinger, 1993). Timothy Bates ( 1997), in turn, has shown that successful Asian-American small businesses rely more on equity capital and formal financial institutions' credit than on family or lending-circle funds. Are formnal banking structures important in minorities' access to credit? This question is answered here by examining recent experience in multi-ethnic Los Angeles. Los Angeles has seen a sizable inflow of Asian immigrants, who no longer cluster in the inner city but have been expanding into suburban communities. Several Asian ethnoburbs (Wei Li, 1997) have arisen, in part due to the formal economic institutions spawned by ethnic business networks, including many Asian-American banks (Yu Zhou, 1996). Dymski et al. (1998) suggest the termn ethnobank to denote banks that are owned or controlled by members of ethnic minority groups and which primarily provide financial services to ethnic businesses and residents. Why might ethnobanks play a special role in ethnic communities' economic activities? Until the Civil Rights era, etimic banks fell into two categories: African-American banks focused on customers left unserved because of segregation and racial discrimination (Lisa Ammons, 1996) while Asian-American banks supported exportimport activities (Peter Kwong, 1987). Civilb rights laws and desegregation made mainstrea banks more accessible to minority customers. Before deregulation and the informationprocessing revolution, banks delivered credit and other financial services through multipurpose branches; these solved the principal-agent problems inherent in credit contracts by building up localized knowledge rooted in sustained bank-customer relationships. But banks have increasingly established centralized loandecision processes emphasizing standardized public information, not informal private information. For many banks, bank branches are now primarily venues for selling financial products, not hubs for gathering information and making loan decisions. Consequently, banks now open and maintain branches in what Angela Chang et al. ( 1997) ternm rational herding' pattems; t Discussants: Robert Avery, Federal Reserve Board; Elijah Brewster, Federal Reserve Bank of Chicago; Darryl Getter, U.S. Naval Academy; Sonya Williams Stanton, Ohio State University.