The collapse of Silicon Valley Bank and Signature Bank sent depositors fleeing into the arms of large “Systemically Important Banks,” even after the federal government stepped in aggressively to restore confidence and calm markets.
Too-big-to-fail banks may help individuals and businesses feel better about the safety of their accounts in the short-term. But the shift will be devastating for lower-income families, small businesses, and communities of color if the federal government doesn’t counterbalance their emergency efforts with major, long-term commitments to the community finance sector.
Such support is not only good policy. It is essential to build trust with communities who feel that large banks – which often exclude community members from financial inclusion and access to capital – are always bailed out at their expense.
The community finance sector – including minority depository institutions, community development financial institutions, credit unions, and others – was formed more than four decades ago after the passage of the Community Reinvestment Act. It has been largely bootstrapped ever since. The sector, by some estimates, is less than 2% of the U.S. financial system despite the fact that it serves millions of un- and under-banked Americans.