An analysis of financial institutions in Black-majority communities: Black borrowers and depositors face considerable challenges in accessing banking services

In traditional credit scoring, this stage begins with the verification of documents such as ID, passport, business licenses, among others. It continues with the study of past financial information such as balance sheets, financial statements, cash flow, etc. In the case of a company, the scope of the project is also studied, in other words, whether the project is scalable, its business performance, competition levels and company growth. Analysts use this data to understand potential risks, and if the person or institution will have the sufficient liquidity to pay the loan.

Yet, fintech should not be considered a comprehensive solution to racial disparities in access to capital. There remains a large share of households that lack access to broadband in the U.S. This is exacerbated by the fact that, as shown in Figure 2, counties with less banking competition (as measured by the Herfindahl Hirschman Index) also have lower shares of households with wired broadband connections. A credit study is a mandatory first step for any person or company willing to obtain a loan. This analysis aims to indicate how soluble borrowers are, whether they are able to meet their obligations and, contrarily, what is the potential magnitude of their credit risk. Typical education credentials often require a business related bachelor’s degree majoring in finance, business, statistics, or accounting (to include an emphasis in finance or economics).

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Finally, we look at special considerations applicable to the analysis of (i) high-yield (low-quality) corporate bonds and (ii) government bonds. An example of a financial ratio used in credit analysis is the debt service coverage ratio (DSCR). The DSCR is a measure of the level of cash flow available to pay current debt obligations, such as interest, principal, and lease payments. Cut loan processing time with Sageworks Credit Analysis, which allows banks and credit unions to spread and analyze loans quickly.

• Benchmarking using administrative data suggests that NETS is an accurate portrayal of the cross-section distribution of establishments (Barnatchez et al. 2017).
• Maintenance covenants require the borrower to maintain remain in compliance with certain levels of credit metrics and are tested periodically.
• Figure 4 shows this relationship in the six metropolitan areas of Baltimore, Cleveland, Detroit, Pittsburgh, Philadelphia, and St. Louis.
• The more senior lenders there are, the more difficult it could be for lower priority claims to be paid in full, as senior lenders such as banks are risk-averse; meaning capital preservation is their priority.
• Some businesses choose not to spend any time on credit analysis when a customer order is quite small, on the grounds that the cost to conduct the analysis is greater than the potential loss from a bad debt.
• In the case of a company, the scope of the project is also studied, in other words, whether the project is scalable, its business performance, competition levels and company growth.

From the lender’s point of view, it is essential to have some sort of safety and surety against the loan being granted. For this, the credit analysis helps both the corporation and the lender as it will provide surety to the lender by providing the corporation’s creditworthiness, and the lender can invest the money depending upon the level of risk. Traditionally most banks have relied on subjective judgment to assess the credit risk of a corporate borrower. These characteristics are commonly referred to as the 5 Cs.[1] Developing this type of expert system is time-consuming and expensive. Incorporating certain soft (qualitative) data in a risk model is particularly demanding, however successful implementation eliminates human error and reduces potential for misuse.

Turn complex transactions into rich credit insights

The existing liens and provisions found in inter-creditor lending terms regarding subordination need to be examined because they are very influential factors in the recoveries of claims. For example, a company cannot raise debt or complete a debt-funded acquisition if doing so would bring its total leverage ratio above 5.0x. Many of the requirements listed below are relatively straightforward, such as the maintenance of required licenses and the filing of required reports on time to comply with regulations, but these are signed as standard procedures. Debt covenants represent contractual agreements from a borrower to refrain from certain activities or an obligation to maintain certain financial thresholds. Credit ratings can also be insightful, but rating agencies require time to adjust ratings, and because of this time lag, rating downgrades can be a bit behind the curve and serve more as a confirmation of existing concerns in the markets.

Banking access in the Black community has not only been limited by the decrease in the number of Black-owned banks, but by an overall decrease in the number of banks in majority Black neighborhoods. Since 2010, the number of banks in majority-black neighborhoods decreased 14.6%, with JPMorgan shrinking its branch footprint in majority-black neighborhoods by 22.8% from 2010 to 2018, compared to a decline of just 0.2% in the rest of the U.S. (Fox, et al., 2019). Banks carry out credit analysis by evaluating loan applications based on their merits.

Proprietary indicators to make informed credit risk decisions

According to the Fed, in 2019 the majority of U.S. adults had a bank account and relied on traditional banks or credit unions to meet their banking needs, but gaps in banking access existed. Six percent of American adults were unbanked meaning that they did not have a checking, savings, or money market account. Approximately 40% of unbanked adults used an alternative financial service during 2018— such as a money order, check cashing service, pawn shop loan, auto title loan, payday loan, paycheck advance, or tax refund advance.

• The univariate approach enables an analyst starting an inquiry to determine whether a particular ratio for a potential borrower differs markedly from the norm for its industry.
• Individuals with less risk are more likely to get their loan than individuals with a high level of risk.
• Simply put, the borrower may NOT undertake a certain action if it causes the borrower to violate the allowed threshold.
• The big issue with the traditional method of collecting information for a credit analysis is that it does not allow people who are outside the system to be analysed, such as students,  immigrants or entrepreneurs.

New detailed microdata provide descriptive evidence that Black borrowers and depositors are substantially more constrained in their access to banking services. This is visible across a range of services, including deposits, residential mortgage credit, and business loans. First, supervisory tools developed in the aftermath of the 1977 Community Reinvestment Act do not seem adapted to the “big data” of the 21st century. Better information means it’s easier than ever to identify paths to improvement for bank and nonbank lenders.

Careers in Credit Analysis

Gary Higgins has 20+ years as a class leader with expertise in Credit Risk Management, Commercial Lending, Credit Analysis and other credit-related topics. Gary currently is on the Faculty of the Graduate School of Banking at Louisiana State University and the Virginia Banker’s School of Bank Management at the University of Virginia. Learn the central considerations and dynamics of both in- and out-of-court restructuring along with major terms, concepts, and common restructuring techniques. Claims held by other creditors and terms in their inter-creditor agreements, especially senior creditors, become an important factor to consider in both out-of-court and in-court restructuring. The collateral coverage calculates the value of the liquidated collateral to see how far down the claims it can cover. Simply put, the borrower may NOT undertake a certain action if it causes the borrower to violate the allowed threshold.

With Inscribe, you get intelligence on things like non-sufficient funds activity, overdraft events, and more that provide deeper insight into money management. Leverage centrally-stored borrower data like credit scores and debt information to spread financials automatically, calculate ratios, and stop using spreadsheets. Widely accrued expense respected for their expertise in key credit sectors and topics, HJ Sims credit analysts publish Weekly Market Commentary for clients, staff, and industry colleagues. Regarded for expertise in key credit sectors and topics such as senior living, HJ Sims analysts often provide expert commentary to mainstream and trade media.