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Banking Deserts, Structural Racism, and Merger Law

By Christopher R. Leslie. Full Text.

Roughly seventy million Americans cannot access a bank account or traditional financial services. Many of these individuals live in a “banking desert”—a town or community that has neither an independent bank nor a branch office of a larger bank. The United States has over 1,100 banking deserts, with another 1,000 communities at risk of losing their last bank. Banking deserts are generally in low- and moderate-income neighborhoods, which are disproportionately communities of color. Residents of banking deserts lack access to credit, including mortgages and small business loans, as well as savings accounts and other basic financial services. Consolidation in the banking industry is increasing the number of banking deserts as merged banks close their local branches. 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 a banking desert.

Understanding the phenomenon of banking deserts requires appreciating four separate strands of sociolegal history: bank decision-making, financial racism, bank regulation, and antitrust law. This Article tells each of these stories in turn and weaves these strands together. It then explains how proper interpretation and application of antitrust law could help mitigate the problem of banking deserts.

Many banking deserts were created or precipitated by government policies and banking practices that intentionally excluded Black families from the banking system. New Deal agencies like the Federal Housing Administration adopted strict redlining policies that blocked government-backed mortgages for Black families and often required developers to have “whites-only” housing tracts. These policies created Black neighborhoods without banks, locking minority families into cycles of poverty. More recently, banking deregulation and weak merger enforcement have fueled branch closures, especially in poor and minority neighborhoods.

Banking deserts should be treated as an antitrust issue be- cause branch closures reduce output and increase the price of credit, which are quintessential antitrust injuries. Despite these harms, the Department of Justice (DOJ) Antitrust Division has largely abdicated its role in bank merger review, generally deferring to the federal banking agencies (e.g., the Federal Reserve Board). But the banking agencies do not apply antitrust principles properly because they define the relevant geographic market too broadly.

When reviewing proposed bank mergers, federal banking agencies focus exclusively on state and regional banking markets, paying insufficient attention to local markets and how post-merger branch closures can create banking deserts. They fail to appreciate how banking practices in the aftermath of branch closures can replicate the intentional discrimination of the redlining era because banks dramatically reduce lending in neighborhoods where they no longer maintain a physical branch office. Just as it was immoral for government actors to redline minority communities beginning in the 1930s, it is inappropriate for government officials today to define banking markets in ways that ignore the continuing costs of historic redlining.

This Article explains the advantages of resuscitating the DOJ’s role in bank merger review. It advocates that the DOJ exercise its leverage during the merger review process to negotiate merger conditions designed to preclude branch closures and to restore financial services to banking deserts. Applying antitrust oversight, the DOJ can mitigate some of the anticompetitive effects and racialized impacts of banking deserts.