Cleveland Federal Reserve study examines racial disparities in credit during pandemic
Minority business owners applying for loans during the pandemic had less luck getting the requested money than white-owned businesses.
That’s according to a report released Tuesday from the Cleveland branch of the Federal Reserve.
Using data from the U.S. Census Bureau’s Annual Business Survey, conducted in 2021, bank researchers found that Black, Hispanic and Native American-owned businesses were more likely to apply for new credit in 2020 than white-owned businesses, but the minority-owned businesses were less likely to receive the full amount they asked for.
Only 35.7% of Black-owned businesses and 41.6% of Hispanic-owned businesses received the requested credit, while 57.6% of white businesses were successful in their applications.
This is the first time this detail on access to credit has been available for use by researchers since 2003, according to Mark Schweitzer, an economist at the Cleveland Fed and coauthor of the study.
“We’re essentially confirming old results and results that didn’t have as strong of a survey as what we had with the Annual Business Survey,” Schweitzer said. “I don’t think this result is the result of the pandemic, but it is the case that many minority-owned businesses did fare worse in the pandemic as well.”
A companion study by the Federal Reserve Bank in Atlanta found that more minority-owned businesses reported reductions in revenue than white-owned businesses in 2020. The study also found that more government pandemic-related assistance went to white-owned firms.
About 67% of the white-owned businesses that received government support in 2020 did not have to pay back more than 75% of that assistance, compared to just 54% of minority-owned businesses.
Reduced access to credit and higher repayment requirements on government assistance during the pandemic had an effect on minority business owners’ outlook for 2022.
When the survey asked businesses whether they expected to operate at or above current levels this year, more than half of the white-owned businesses said they did, while less than half of all minority-owned businesses said they did not.
Schweitzer said that, while government assistance like the Paycheck Protection Program during the pandemic made the last two years different, credit is still needed coming out of a recession.
“It’s part of how they manage to make it or not make it through a difficult time,” Schweitzer said.
He said one way to address the disparity in access to capital is by making changes to the Community Reinvestment Act, which encourages banks to invest in low- and moderate-income neighborhoods.
“It’s not a perfect fit for race and ethnicity differences in credit,” said Schweitzer, who added the Federal Reserve board is considering rule changes for how the CRA works. “I think our results really say that is an important issue that the Board of Governors and other federal regulators should be trying to build into their policy.”