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FDIC teams up with Microsoft and Truist to create fund to invest in minority-owned banks

Jelena McWilliams, chair of the Federal Deposit Insurance Corporation (FDIC), speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Aug. 3, 2021.Al Drago | Bloomberg | Getty ImagesThe Federal Deposit Insurance Corp. will unveil this week a new investment fund backed by corporate giants that will offer…

Jelena McWilliams, chair of the Federal Deposit Insurance Corporation (FDIC), speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., U.S., on Tuesday, Aug. 3, 2021.

Al Drago | Bloomberg | Getty Images

The Federal Deposit Insurance Corp. will unveil this week a new investment fund backed by corporate giants that will offer stakeholders a way to channel much-needed capital to banks owned by and in support of people of color.

The new Mission-Driven Bank Fund will exclusively invest at banks that service minority, lower-income and rural communities that often suffer from a lack of long-term capital, according to documents seen by CNBC.

The project represents the latest government-backed effort to support minority-owned banks, which have struggled in recent decades because of failed loans, competitors that are larger as a result of  mergers and acquisitions, and financial downturns that have an outsized impact on smaller banks.

“One of the things that I heard in the beginning, and in particular for Black banks, was a lack of capital. Finding good capital to come to the banks was the No. 1 thing,” FDIC Chair Jelena McWilliams told CNBC on Monday.

Microsoft and Truist Financial are so-called anchor investors in the fund, each putting in tens of millions of dollars to help it launch. The fund, also supported by media giant Discovery, has raised approximately $120 million to date.

The fund’s conception and design also implicitly endorse a new school of thinking on the best ways to support minority-owned, community-focused banks that center on the importance of long-term “patient” capital.

Longer-term investments — such as equity or debt financing — allow lenders greater flexibility to lend capital to borrowers at a profit, the main moneymaking lever for consumer and small-business banks.

Minority bank advocates hope that more million-dollar corporate deposits or a greater number of certificates of deposit will buy smaller banks enough time to not only generate profits but also to help rectify race-based economic inequities.

McWilliams said her early work on the fund included conversations with small bank CEOs about how the federal government could best help them in their mission to boost homeownership and business formation among communities of color.

“This fund is supposed to leverage the investments from others under the brand of the FDIC,” she said, “and then allow every dollar to be multiplied exponentially for the benefit of homeowners and small businesses and credit in the communities where it is needed the most.”

Founded in the aftermath of the Great Depression of the 1930s, the FDIC is perhaps best known as one of the nation’s top bank regulators, and it insures American consumers against sudden deposit losses at member banks. In an effort to prevent “bank runs” through deposit insurance, the FDIC ensures that member banks meet a variety of financial stability metrics.

Then-President Donald Trump nominated McWilliams to lead the FDIC, and the Senate confirmed her appointment in May 2018.

The FDIC will have no role in managing the fund since doing so could pose legal headaches and potential conflicts of interest for the bank regulator.

Still, the idea for the fund was first pitched by McWilliams, who said she was inspired a few years ago during a flight. Flicking through her seatback television, she eventually tuned to ABC’s popular investing show “Shark Tank.” Reruns of “Shark Tank” also air during prime time on CNBC.

“As I saw different investors pitching their themes to the sharks, I thought, ‘Well, why don’t we have a “Shark Tank”-like fund for minority depository institutions?'” McWilliams recalled. “As soon as I landed, I called up Brandon [Milhorn], who’s my chief of staff here. And I said, ‘Brandon, I want us to have a “Shark Tank” for minority banks.'”

“And he’s like, ‘Oh dear Lord! How are we going to do that?'”

Years later the fund is ready to launch. Investors will have a new way to drive capital to two special classes of lenders known as Minority Depository Institutions and Community Development Financial Institutions, collectively known as “mission-driven” banks.

The FDIC defines an MDI as any bank it insures for which 51% or more of its voting stock is owned by minority individuals, or a majority of its corporate board are members of a minority group and the community that it serves consists predominantly of minority groups.

The Treasury Department certifies every MDI and CDFI, which must show that at least 60% of their total lending, services and other activities benefit low-income communities. As of March 2021, the FDIC insured 142 MDIs and 172 CDFIs.

Bank leaders hoping for an investment from the Mission-Driven fund will submit pitches to the committee and the forthcoming manager, who will decide whether to provide the lender with an equity investment, debt financing, loss-sharing agreements or other capital.

“Supporting mission-driven banks a

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