Social and economic policy interventions best left to fiscal and regulatory policies, most of which come under parliamentary scrutiny, writes Jack Mintz in the Financial Post. Below is an excerpt from the article, which can be read in full here

By Jack Mintz, November 30, 2020 

Banks and financial intermediaries play a crucial role in spreading risk, providing information and reducing transaction costs among investors and borrowers. But when banks follow lending practices that have little to do with commerce but instead focus on social and political objectives, financial markets become distorted. That can lead to higher borrowing costs, lower saving rates and greater default risks. Two types of non-commercial practices have recently crept into U.S. markets.

The first is related to discrimination in lending. With the death of George Floyd, the Black Lives Matter movement has encouraged banks to provide advantageous lending terms to Black and other minority borrowers. The change is based on data showing that minority borrowers are more frequently denied loans or steered to products with higher interest rates, presumably because of discrimination although higher credit risk could also be a concern.

Preferential lending seems contrary to the intent of the Equal Credit Opportunity Act and Fair Housing Act, which prohibits credit decisions based on race. For example, a bank cannot charge different mortgage rates to minority and white borrowers with the same credit risk. On the other hand, neither can it provide advantageous financing to minority borrowers, which is a goal of many social policy advocates.

Banks are getting around the non-discrimination rule with new “supply-chain financing” structures aimed at helping minority-owned businesses. A supplier of goods and services to minority-owned businesses will receive faster reimbursements from the bank than other borrowers will. To compensate the bank, the supplier either pays a fee or receives a discounted payment from the bank. In the end, the minority business has more working capital while the bank makes some profit as compensation. To help fund its supply chain financing, the Bank of America is also using a $2-billion “green bond” raised from ESG lenders.

***TO READ THE FULL ARTICLE, VISIT THE FINANCIAL POST HERE***

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