Excerpted From: Christopher R. Leslie, Banking Deserts, Structural Racism, and Merger Law, 108 Minnesota Law Review 695 (December 2023) (680 Footnotes) (Full Document)

ChristopherRLeslie.jpegIn 1966, the residents of Itta Bena, Mississippi, witnessed history when the Reverend Martin Luther King, Jr., led a civil rights march from Greenwood to Itta Bena. Today, the view from the town's porches is decidedly less inspiring. From his doorstep, Shawn Robinson can see the town's only downtown ATM. When the ATM runs out of money, Robinson observes women openly sobbing and men punching the brick wall, careful to avoid hitting the machine itself, lest they damage the ATM and take it out of commission. Any long-term ATM outage could prove catastrophic for the town's residents: the solitary downtown grocery store only accepts cash. Life can be precarious in Itta Bena. Although its name is derived from the Choctaw phrase for “forest camp,” Itta Bena is a desert--though not in the ecological sense. Itta Bena is a banking desert, a community with no full-service bank, whose inhabitants are effectively cut off from the nation's financial system. Its residents exist in a permanent state of financial uncertainty and insecurity.

Itta Bena is not unique. The United States has over 1,100 banking deserts, about 400 in urban neighborhoods and over 700 in rural areas. More than 1,000 additional communities are at high risk of becoming deserts because they have only one bank, creating a precarious position for over 200 urban districts and more than 850 rural regions. Banking deserts are generally in low- and moderate-income (LMI) neighborhoods. Indeed, residents in poor neighborhoods are more than twice as likely to live in a banking desert than those who live in higher-income areas. The financial crisis of 2008 worsened the situation.

Trend data is not encouraging. Over the past century, the number of banks in the United States has plummeted from more than 30,000 in the 1920s to fewer than 5,000 in the 2020s. Recent closures of bank branch offices measure in the thousands, a historically high rate. Each year, hundreds of branches have closed. In the five-year period from mid-2012 to mid-2017, several large banks shuttered a significant fraction of their branches, with Capital One slashing 32% of its branches and SunTrust Banks cutting 22% of its network. In addition to nationwide banking behemoths closing branches, community banks are also closing in high numbers. These closures can prove devastating because physical banks are critical to residents of LMI communities, where online banking is generally unavailable or impractical.

These waves of bank and branch closures have occurred in every type of county--metropolitan, micropolitan, and rural. But bank and branch closures strike rural America the hardest. Given their geographic isolation, rural banking deserts are uniquely devoid of banks.

Even during periods when the total number of banks and branches nationwide was rising, the aggregate number of offices can disguise the declining number of banks in particular communities. In the decade before the 2008 financial crisis, as merger activity shrank the number of banks nationwide, regulators took solace in the fact that the total number of branch offices was increasing. But branches opened in wealthy areas and closed disproportionately in LMI neighborhoods. Of the 2,000 branches shut down between 2008 and 2013, 93% “were located in postal codes where the household income is below the national median.” Large banks, in particular, are abandoning LMI neighborhoods. For example, recently, over 80% of JPMorgan Chase's branch closures have been in LMI census tracts. It's not uncommon for upper-income neighborhoods to experience net gains in bank branches at the same time that poor neighborhoods are suffering significant net losses. National financial markets that function properly for wealthy households nonetheless deprive low-income households of access to banking services.

Many banking deserts are caused or reinforced by structural racism, banks' indifference to serving less-wealthy communities, bank deregulation, weak merger enforcement, or a combination of these and other reasons. This Article explains how these factors interact to prevent millions of Americans on the lowest rungs of the economic ladder from ascending any higher. Historically, systemic racism blocked Black families from obtaining mortgages and participating in the banking system more broadly. Federal policies explicitly prohibited government-backed mortgages for Black borrowers and required federally subsidized housing developments to exclude Black buyers and renters. Overtly racist government policies locked Black families into less desirable neighborhoods. Even after federal civil rights laws forbade de jure discrimination, banking practices perpetuated historic patterns of racial segregation. In recent decades, the confluence of bank deregulation and weak antitrust oversight of bank mergers has led to waves of bank and branch closures that have devastated urban neighborhoods and rural communities, locking many of them into cycles of poverty.

Fortunately, more assertive use of antitrust principles during merger review could help alleviate the problem of banking deserts. Part I highlights the harmful effects of banking deserts on individuals, families, and communities. Part II explains the importance of proximity to banks. The distance between a bank and its potential customers has an important causal effect on lending decisions. After banks depart a community, fringe banking (such as payday lenders) and fintech (such as mobile banking) cannot appropriately satisfy the financial needs of people living in banking deserts. Part III demonstrates that many banking deserts arose in the wake of government policies and banking practices that intentionally excluded Black families from having access to mortgages and credit more generally. Part IV explores how failures in banking regulation and merger law have perpetuated the problems of branch closures and banking deserts, especially in poor and minority neighborhoods. Branch closures and banking deserts implicate antitrust law because they reflect failures of the competitive market, resulting in reduced output and increased prices, which are classic antitrust injuries. Part V proposes revitalizing the Department of Justice Antitrust Division's role in bank merger review and reconceptualizing the antitrust analysis of geographic markets to reflect how residents of banking deserts are effectively isolated from the market. This Part recommends using merger conditions to address the twin challenges of banking deserts and branch closures in communities at risk of becoming banking deserts. Given their reliance on government subsidies, insurance, and bail-outs, banks are not strictly private enterprises; they serve a public purpose, and federal officials should use their authority during merger review to ensure that banks fulfill their duties to the public.

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Banking deserts are not inevitable. They are not a necessary evil; just an evil. Weak merger review has allowed bank mergers that subsequently eliminate branches from LMI neighborhoods. As a result, millions of households are denied meaningful access to traditional financial services and are forced to rely on predatory payday loan centers and other high-priced alternative lenders. These effects are often racialized because of decades of mortgage and lending discrimination against minority households. Properly executed, treating branch closures and banking deserts as an antitrust problem can harness the expertise and leverage of the DOJ Antitrust Division to prevent banks from abandoning local markets post-merger. This should provide better opportunities for LMI households to build wealth.

America's history of redlining and other forms of mortgage discrimination should inform how geographic markets are defined when reviewing proposed bank mergers. Housing segregation affected the evolution of geographic markets as that concept is used in antitrust analysis. Even after redlining based on race was outlawed, lenders replicated racial redlining by using loan applicants' zip codes to make lending decisions. Banks--and for decades, the federal government through the FHA--have treated minority neighborhoods as separate markets for lending purposes. Remedial symmetry warrants treating these same neighborhoods as relevant geographic markets when reviewing bank mergers to ensure that these neighborhoods do not again suffer reduced access to credit on fair terms.

We are at an inflection point. Upon taking office, President Biden issued an executive order to encourage reinvigoration of antitrust policy, including more appropriate bank merger review in order to “ensure Americans have choices among financial institutions and to guard against excessive market power.” The Assistant Attorney General in charge of the DOJ's Antitrust Division, Jonathan Kanter, has announced that “it is appropriate for us to reassess whether the prevailing approach to bank merger enforcement is fit for purpose given current market realities.” As this Article is going to press, antitrust and banking officials are discussing issuing a new, updated version of the federal Bank Merger Guidelines, to replace the now-out-of-date 1995 guidelines. It would be wise to include explicit consideration of the problems of bank closures and banking deserts in those new guidelines.

Chancellor's Professor of Law, University of California, Irvine School of Law.