The Economic Performance of African-American-Owned Banks: The Role of Loan Loss Provisions

Abstract

Economists’ interest in African-American banking institutions dates back to the early 1970’s when Andrew Brimmer cast a factual, yet ominous shroud over the efficacy of African-American banks as engines for growth in African-American community economic development. Brimmer (1971 p. 207) stated, ‘‘Black banks are helpless as a vehicle to produce change in minority communities as a result of serious weaknesses in management capability.’’ In addition, earlier studies noted that African-American banks in particular face higher loan losses than their nonminority peers, employ more conservative, assetportfolio management strategies, and operate with lower ratios of equity capital to assets (Brimmer, 1971; John T. Boorman and Myron L. Kwast, 1974; Timothy M. Bates and William D. Bradford, 1980; Kwast, 1981). All of these practices inevitably work to reduce bank profitability and limit growth capability. Recent research by Elyas Elyasiani and Seyed Mehdian (1992) and Iftekhar Hasan and William C. Hunter (1996) compare the operating performance of minority and nonminority banks to a set of ‘‘best practice’’ banks that produce financial products and services at the lowest cost using the most efficient mix of productive inputs. This paper builds upon this previous work on managerial inefficiency in minority banking institutions by identifying proximate causes of inefficiency. Due to the adverse socioeconomic conditions of urban areas where many minority-owned banks are located, these institutions are faced with risk and uncertainty unique to those par-