How the SEC can protect investors, companies, and the public from another Texas power crisis
The Securities and Exchange Commission (SEC) is considering making important changes in disclosure requirements to reflect the growing recognition that climate change poses significant risks to the U.S. financial system.
This week, hundreds of investors, companies, and concerned Americans responded to the SEC’s request for public input on climate change disclosure.
Recent Brookings analysis co-authored by one of us on the intersection of climate change and financial markets has shown that a significant blind spot for financial institutions is how the physical impacts of a warming world affects assets. But, outside of insurance, relatively little has been said about financial vulnerabilities stemming from extreme weather.
The massive storm that hit Texas in February — known as Winter Storm Uri — highlights the dangers of ignoring the physical risks of climate change. Frigid temperatures and ensuing blackouts led to the deaths of more than 150 people and caused billions of dollars in damages. The blackouts also disrupted dozens of public companies, hundreds of small businesses, and millions of lives, raising a slew of questions for public officials.
In our new report, we focus on one of those questions: What did the financial markets know about the odds and impacts of a storm like this before it happened? Our report looks at SEC regulatory disclosures made by publicly-traded electric utilities and suppliers in Texas, and offers a clear answer: not much.
Even though Winter Storm Uri was foreseeable, and many firms, to varied degrees, had weatherization plans, existing SEC disclosure requirements did not elicit filings that conveyed the good, the bad, and the ugly in preparedness by utilities, power generators, and regulators. The tragic events set in motion by Uri highlight the need for significant improvement. Part of that improvement should come in the form of SEC rules that mandate the disclosure of specific and decision-useful climate information, built on the Task Force on Climate-related Financial Disclosure (TCFD) framework and aligned with leading climate science. Better climate disclosures can help investors analyze, manage, and price climate risk, which can in turn enable companies to embrace further climate resilience measures and therefore mitigate the destruction of extreme events like Winter Storm Uri.
The foreseeability of Winter Storm Uri
To analyze investors’ ability to incorporate the risk of an event like Winter Storm Uri into decisionmaking, we reviewed the 10-K reports of seven companies operating in the Texas power sector: three publicly-traded power generators and four publicly-traded utilities. The SEC requires public companies to file 10-Ks annually to provide investors and the market with details on corporate financial performance. 10-Ks undergird investment decisionmaking and are the bedrock of financial risk evaluation. Because climate change presents clear financial risks to companies, we would expect discussion of climate-related risks to appear in 10-Ks, no different from traditional financial risks. However, they rarely do.
Texas power generators and utilities, in particular, have good reason to address climate-related physical risks in their 10-Ks given both past encounters with extreme weather and increasingly sophisticated climate science and risk modeling available to the electric sector. In 2019, Texas accounted for seven of the United States’ 14 billion-dollar weather and climate disasters. In 2017, Texas faced significant power outages due to torrential rain and intense winds from Hurricane Harvey. In 2011, cold temperatures caused electric failures that impacted 3.2 million Texans, prompting the Federal Energy Regulatory Commission and North American Electric Reliability Commission to issue a report calling for Southwestern power generators and utilities to winterize their operations.
Based on those past environmental disasters and existing climate science, the increased intensity and frequency of extreme weather events like Winter Storm Uri are increasingly knowable to companies, with a level of uncertainty common for many financial risks.
The existing disclosure regime failed to prepare investors for Winter Storm Uri
Despite this foreseeability, existing SEC regulations did not elicit company submissions of specific, useful physical risk information in reviewed 10-K reports. Limited risk disclosures in turn undermine investor decisionmaking and overall market function.
Our research found that 10-Ks considered extreme weather, but only in vague ways — with little connection to impacts of and preparedness for events like Winter Storm Uri. More concerning, 10-Ks framed the freeze as a rare, point-in-time event unlikely to recur. With climate change, however, such events could plausibly become more common or extreme or both.
Moreover, although Winter Storm Uri caused billions of dollars in damage, reviewed 10-Ks were barely altered from previous years, with disclosure practices between 2020 and 2021 near-mirror images of each other. For instance, only 3% of words differed between the 2021 and 2020 climate-related physical risk sections of one major power company’s 10-Ks.
The need to strengthen SEC regulation is made particularly apparent by recent advances in climate science and risk analysis. The SEC should consider, for example, that many firms currently have access not only to large-scale climate models but downscaled projections that indicate company-specific and even asset-specific risks. Consolidated Edison, for example, undertook a Climate Vulnerability Study in 2019 that helped the utility estimate specific climate vulnerabilities. With these tools, companies can learn a lot about their physical risk exposure from year to year, especially after facing extreme weather.
Our finding that 10-Ks failed to incorporate new insights and learning reveals a concerning trend: Current SEC rules do not ask companies to remember key lessons from past weather events nor imagine the potential future impacts of climate change on their businesses. Companies’ collective inability to provide dynamic, useful information to investors highlights the need for new disclosure regulation.
How the SEC can protect investors from future extreme weather events
While we look, in our study, at individual companies, what’s clear is that thin disclosures are an industry-wide phenomenon. Companies’ sparse 10-Ks reflect widespread practices for disclosure, and that’s why the SEC needs to act. Through updated rulemaking, the SEC can help ensure that investors and others are prepared for extreme weather events.
Based on our findings, we encourage the SEC to:
Require the disclosure of climate-related information that investors and other market participants need to make informed business decisions. Winter Storm Uri shows that existing voluntary disclosure practices do not provide investors with sufficient climate risk information.
Make mandatory and build on the TCFD framework, recognizing that the current voluntary standards do not ensure specific, decision-useful climate disclosure. Because both TCFD-aligned and non-TCFD-aligned companies in Texas failed to disclose adequate climate information, we believe that SEC regulation should not rely entirely on the TCFD to yield improved disclosure practices.
Align disclosure requirements with advances in climate science and risk analysis. To ensure that companies imagine the forward-looking ramifications of climate change on their business, disclosure guidelines should keep pace with both macro climate science and more micro innovations in climate risk analysis, both of which continue to evolve.
At last, it seems, the U.S. is getting a lot more serious about climate change. Part of the policy answer lies with the SEC — requiring the disclosure of needed climate information to improve capital allocation and avoid inefficient, and in some cases deadly, market instabilities. Updating disclosure rules to protect investors, companies, and the public is long overdue.
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Task Force on Financial Stability: Report release
For the past year and a half, the Task Force on Financial Stability has been identifying gaps in the financial regulatory architecture and other features of the financial system that make it insufficiently resilient to adverse developments. Co-sponsored by the Hutchins Center at Brookings and the Initiative on Global Markets at the Chicago Booth School of Business, the task force recommends ways to assure that the financial system can support economic growth even after the economy and financial system have been hit with a bad shock. The report focuses on vulnerabilities outside the regulated banking system—the U.S. Treasury market, clearinghouses, open-end mutual funds, and other markets and non-bank financial institutions—because the capital footings and regulation of banks were substantially strengthened after the global financial crisis. It also recommends ways to strengthen the regulatory structure and process.
At this report release event on June 29, the task force co-chairs, Glenn Hubbard and Don Kohn, summarized the task force’s findings and recommendations. Following their presentation, a panel that included task force members and academic experts on finance discussed the recommendations and underlying financial stability issues.
During the live event, the audience submitted questions at sli.do using the code #FinancialStability, or on Twitter using the hashtag #FinancialStability.
As the EU debates rules for its economy, a more ambitious political vision is inevitable
A year ago, the European Union arrived at a Hamiltonian moment. The sense of human solidarity in the face of the COVID-19 pandemic and the deaths it was causing pushed European leaders to make unprecedented choices. The heart attack suffered by the economy justified a surge of concrete and mutual support. To manifest it, fiscal rules constraining member states’ social expenditures were suspended and a sizable and shared EU financial facility was established through the issuance of common debt. Europeans seemed ready to follow in the footsteps of the agreement engineered in 1790 by Secretary of the Treasury Alexander Hamilton that transformed the United States into a true federation with a stronger central government.
Carlo Bastasin
Nonresident Senior Fellow – Foreign Policy, Center on the United States and Europe
Twitter
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The aim was not only to help the European Union’s most affected countries to overcome the health and economic crises, but to create structural convergence between all its countries. An economically more homogeneous EU would be more homogeneous politically as well. As a result, the sharing of common resources and the new political harmony would write a new page in European history.
A year later, European economies are recovering faster than expected. The recession has left behind very high debts, but the sense of emergency has receded and Alexander Hamilton’s spirit is in danger of waning. This September, the EU will start debating how to change the rules that regulate its economy. Eventually, the EU institutions and the 27 member state governments will have to agree on how aggressively they will use fiscal policies, if they need to pool resources together and share their allocation, or if monetary and fiscal stability are more important than temporary unemployment or chronically low investment. The decision will have an impact well beyond the convergence of EU economies. In fact, all the political objectives of the European Union — environmental protection, external and internal security, and technological development, among others — will be affected by the decisions on how the money will be spent and the extent to which EU fiscal rules will leave room for higher investment. Europe’s future depends on the design of those new rules and leaving them only to financial priorities would be a historic mistake.
Past experience bodes badly, showing a distinctive flaw in the European decisions on economic governance. A way to synthetize it is the following: a rear-mirror mentality wrapped in a small-country syndrome. Inflation in what are now the core economies of the euro area last spiked at high levels around 1981, 10 years before the Maastricht Treaty enshrined a goal of price stability to be enforced through market discipline. The first attempt at establishing fiscal coordination took place, instead, in 1997, a decade after the liberalization of Europe’s capital markets and 15 years after the increase in the real cost of public debts. It was only in 2005 that European policymakers realized that it was necessary to include structural reforms (enforcing labor and capital flexibility) in their economic governance to meet the challenges of phenomena — globalization and digitalization— that had started 10 years earlier.
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There seem to be at least two common threads. The first is that rules governing the European economy not only come late, but they stay around for a long time. When the global crisis broke out in 2008, the rules of the past decades remained in place as the only available toolbox: market discipline, monetary dominance, and structural reforms in a context of fiscal straitjackets. The outcome of the policies responding to the euro crisis was unnecessary suffering and persistent stagnation. After the euro crisis, all kinds of flexible adjustments had to be tacitly applied, at the cost of eroding the credibility of European governance. This prevented any common endeavor to design better economic management. In fact, it took a global pandemic to upturn the existing practices and embrace common debt issuance and fiscal support to get out of recessions. However, this exceptional health crisis has led to an exceptional European policy response. It is far from certain that the new ambitious toolbox aimed at fostering convergence among the EU member states will remain in place once the health and economic crises have been overcome.
The second common thread is that events — and not the battle of ideas, or indeed the battle of prejudices — determine Europe’s policy framework. Moreover, most of those events are exogenous: inflation was triggered by oil price spikes linked to crises in the Middle East; capital markets’ influence on the real economy was imported mainly from other countries; so were new technologies and globalization and more recently, financial crises and even the pandemic. Most of those events were not only exogenous but were also largely unexpected by European policymakers entrenched in small-country mentalies. It is no surprise that the European economic governance response was belated and with poor outcomes.
The decision to launch a debate on the reform of EU economic governance was thus overdue. However, there is still the risk that the new proposals will keep looking backwards rather than ahead, focusing mainly on a convenient “policy mix”: how much public debts will have to be reduced in relation to the degree of “normalization” of monetary policy. It is indeed sensible to base the new policies on the available empirical data, and the latter is necessarily old water, but too often old mindsets come short of making the right decisions for the unknown future.
The main lesson from the past should be that events that determine Europe’s policy responses often come unexpectedly — and, even more often, they come from outside of Europe. Consequently, the first response should be to acknowledge that we know that we do not know. To address the unexpected, Europeans probably need to set up some kind of large rainy-day fund to tackle sudden emergencies. The lack of discretionary funds to purchase the COVID-19 vaccines in 2020 was a point in case. A more accurate risk prevention and a forward-looking analytical capacity is at odds with the small-country mentality of most EU member states which makes it all the more necessary that one should be swiftly brought into being. Discretionary action and strategic thinking can be more than bureaucrats are expected and legitimated to deliver. Consequently, politics must engage and not leave the agenda to be set by financial considerations only.
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As for the (mostly) exogenous nature of shocks, the European Union needs to reflect on its role in the world. Will it remain dependent on other continents for technology and energy? Will it be able to safeguard European values — such as privacy and individual and/or social rights — if it is not able to master the technological frontier? Should it really rely on other states to assure political stability at its borders? Can capital markets, environmental safety, or social commitments be more strictly regulated or preserved in Europe without reducing innovation and people’s preferences?
Almost inevitably, the world’s complex geopolitical landscape is pushing Europe to become more self-reliant. This too affects the design of future economic governance, starting with the relation between savings and investments. Currently, excess savings in the euro area are exported, which pushes growth outside Europe, rather than using them inside the EU for common purposes. Recently, general political objectives — such as environmental protection, the improvement of digitalization, and the achievement of economic convergence — have been introduced by the European Commission and approved by the national governments. The policy response to the pandemic has brought new instruments (use of grants, the possibility to raise new taxes and revenues at the EU level, the issuance of common debt) and new institutional mechanics in which the interests of individual nations are subordinated to common decisions, as well as a new magnitude to the underlying fiscal effort and provision of liquidity at both national and EU levels. Making this toolbox permanent would be a sign of the fact that Europe intends to act more in unison in the future. In fact, one can wonder whether the appropriate level of institutional design should be confined within the powers of finance ministries or even within the priorities of economic governance. It seems inevitable that political considerations — balancing sacrifices today to gain benefits tomorrow, or even the reverse — will become more and more relevant for governing the European economy.
Measuring the financial health of Americans
Executive summary
It is often said that what gets measured gets managed. It’s no wonder, then, that the federal government has been challenged to improve the financial health of American families. Despite all of the data the government collects and analyzes, the reality is that we do not have an accepted method of assessing financial health nor the right data to do so.
Today, most of what gets measured are macroeconomic indicators of national economic performance such as the gross domestic product (GDP), the consumer price index (CPI), the unemployment rate, or aggregate income, spending and savings levels. Most of these metrics are, at best, only loosely related to how ordinary Americans are faring and obscure at least as much as they reveal about the state of families’ financial health, let alone the state of the financial health of those in historically marginalized communities. And while various statistical agencies have put a good deal of effort into measuring annual household or family income, the reality is that treating a family’s income as a measure of its financial health is no more valid than treating gross revenue as a measure of corporate health or gross tax receipts as a measure of a state’s fiscal health. Rather, families’ financial health depends on the interaction of all parts of their financial lives. To measure financial health and make progress in improving it thus requires a more complex set of metrics that captures within individual families not just how much money a family receives over the course of a year but, at a minimum, how it spends, saves, borrows, and plans for the future.
The time has come to establish financial health as the clear North Star for economic and social policy and for the federal government to build an effective system to measure and report on the state of financial health for the country as a whole and for those communities that historically have been discriminated against, marginalized, or otherwise underserved. The key to such a system is a simple and easily-understood way of measuring the financial health of families—one that brings together in a composite index a number of discrete, family-level indicators that together provide a picture of families’ financial health—the interrelationships and interactions between spending, saving, borrowing, and planning. With such an index in place, the government could generate regular reports on the state of our financial health and on the gaps between white, Black and Latino families—reports that could receive the same fanfare as typically accompanies, for instance, the release of the quarterly GDP.
Such a system could spotlight the overall trend lines and provide a means of identifying communities whose financial health is poor, deteriorating, or failing to keep pace with overall improvements. It could drive economic policy and public discourse, providing a means for each administration to define its goals for improving financial health and closing financial health gaps and to measure—and be held accountable for—its progress in achieving its goals. Over the longer term, a systematic program of measuring financial health could provide a more precise tool for crafting eligibility criteria and distribution formula for a range of government programs and could provide a set of benchmarks against which private-sector institutions can assess how they are impacting the financial health of their employees, customers, and communities.
To accomplish this with the speed necessary to meet the moment, it is imperative for the president to assign responsibility for building a financial health measurement system to a senior-level official within the White House. That official would be responsible for convening experts from across the government as well as outside experts to:
Define a set of key indicators of financial health;
Construct a composite index for measuring the financial health of families and grouping them within financial health tiers; and
Design a quarterly data collection and reporting system to make the financial health findings salient.
It is not necessary, however, to await the development of a survey instrument and financial health scale to begin making progress in collecting and reporting on data relevant to assessing financial health and on the gaps between white families and communities of color. In the interim, there are more immediate steps that can and should be taken including:
Expanding the Census Bureau’s Annual Social and Economic Supplement to the Current Population Survey(CPS), which already captures data on household income, to also collect information on savings and debts along with responses to some validated questions of subjective well-being.
Defining financial health segments or profiles through cluster analysis or other statistical techniques based upon the data collected through the expanded CPS.
Reporting annually on the distribution of families within those segments overall and for discrete demographic groups.
In his landmark Executive Order on Advancing Racial Equity and Support for Underserved Communities President Biden pointedly recognized that, a “first step to promoting equity in government action is to gather the data necessary to inform that effort.” The measures we recommend would take that step in order to set the nation on the path towards the executive order’s ultimate and compelling goal: “mak[ing] real the promise of America for every American.”
In a presidential debate forty years ago, Ronald Reagan memorably asked viewers, “Are you better off today than you were four years ago?” After four decades in which economic growth has primarily benefited those at the very top of the economic ladder, it is clear that for tens of millions of families, the answer is a resounding “no.” That lack of progress is particularly true for Black and Latino families which is all the more visible in this moment, as the nation reckons with the vast inequities in health and wealth made plain by both the COVID-19 pandemic and the Black Lives Matter movement.
The Biden-Harris administration was elected to “build back better” and has made clear its deep and abiding commitment to “make real the promise of America for every American.” The president’s historic Executive Order on Advancing Racial Equity and Support for Underserved Communities mandates an “equity agenda” that “matches the scale of the opportunities and challenges that we face” by “advancing equity for all, including people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality.”
But how will we know if we’ve succeeded in building back better for everyone? It is said that what gets measured gets managed. Despite the talk that is rampant during presidential election years about how well families are faring, the reality is that we do not have an accepted method of assessing financial health nor the right data to do so. Instead, policymakers have tended to focus on macroeconomic measures, such as growth in the GDP, or programmatic measures such as the take-up rate among the eligible population of various government programs.
Case in point: Government reporting on the economic impact of the COVID-19 pandemic. Policymakers largely focused on tracking the number of new unemployment claims filed or the number of individuals and small businesses taking advantage of various relief programs such as mortgage forbearance or the Payment Protection Program (PPP). The absence of a definitive measure of financial health meant that policymakers were challenged in their ability to understand the full consequences of the pandemic on families’ financial lives and its disproportionate impact on communities of color, and handicapped in their ability to assess reliably the results of the actions taken in an effort to ameliorate those consequences.
The time has come to establish financial health as the clear North Star for economic and social policy. To do so requires building an effective system to measure and report on the state of financial health, one that brings together a number of discrete, family-level indicators that together provide a composite picture of families’ financial health. Critically, the system must measure and report on the financial health of those communities that historically have been discriminated against or marginalized and whose lives are not well represented by the average trend line.
In this white paper, we first discuss what we mean by financial health and some of the research the Financial Health Network and others have conducted to study the state of financial health in the United States. We then describe our vision for a financial health measurement system centered on a financial health index and the ways that public- and private-sector decision makers could use it to drive policy and measure the efficacy of their actions. Finally, we lay out a set of concrete recommendations for building the measurement and reporting system we envision as well as interim steps that can be taken to assess and report on the state of the nation’s financial health in the near term while work is underway to realize the broader vision we describe.
What is financial health?
Academic literature and policy studies offer a range of definitions for the phrases “financial health” and its cousin “financial well-being.”1 Some are subjective in nature, focusing on levels of financial stress or a sense of financial control. Others focus more on a family’s current, objective financial situation.
In our view, financial health at a minimum should address the ability of individuals and families to meet their current obligations and needs, absorb and recover from financial shocks, secure their future, and improve their financial situation over time. Importantly, while income is an important driver of financial health, income is surely not the only driver. Rather, financial health has both a present and future orientation and considers the totality of people’s financial lives: not only whether they are able to meet current needs but also whether they are spending, saving, borrowing, and planning in ways that will enable them to be resilient and thrive. Treating household income as a measure of the financial health of a family is thus no more valid than treating gross revenue as a measure of corporate health or gross tax receipts as a measure of a state’s fiscal health.
For the past ten years, the Financial Health Network has been studying the financial health of those living in America. This focus was initially inspired by learnings from the U.S. Financial Diaries project, a joint research effort of the Financial Access Initiative of New York University and the Financial Health Network (then the Center for Financial Services Innovation) led by Jonathan Morduch and Rachel Schneider. By tracking 235 low-and moderate-income households over the course of a year to collect highly detailed data on how they managed their finances, we gained insight into hard-to-see aspects of the everyday financial lives of working Americans that are too often obscured by analyses of annual or even average monthly income and expenses.2 Moreover, monthly interviews with the research subjects helped us understand the complexity of their financial lives, and how financial systems and the quality of their lives were so deeply intertwined.
That led us to begin efforts to define and measure financial health. We published our first empirical research on the concept in 2015, and over the ensuing several years, through a process of iterative research, we developed a scale for measuring financial health. This FinHealth Score(R) captures in a single metric a set of eight indicators designed to examine behaviors involving spending, saving, borrowing and planning. Applying a series of statistical techniques, we use these scores to place individuals into one of three financial health tiers: Financially Healthy, Financially Coping, and Financially Vulnerable.
Most recently, we have developed the Financial Health Pulse, a research platform for tracking over time individuals’ financial health and how that changes from one year to the next. The foundation of the Pulse platform is an annual, longitudinal survey administered to the members of USC’s Understanding America Study, a nationally representative online panel that now numbers approximately 9,000 participants. That survey includes the eight scored indicators, along with detailed questions about a range of topics including life events and financial hardships experienced over the preceding year; sources of income and benefits; and the size and the nature of savings, assets, debts, and insurance. The Understanding America Study supplies a robust set of respondent demographics that we analyze for our annual trend reports. In addition, roughly 10% of the sample has authorized us to obtain daily access to transactional data from various of their financial accounts and products, which adds to the picture painted by the survey data.
In the Financial Health Pulse 2020 Trends Report, which was based on a survey administered in July 2020, we found that only one-third of individuals were financially healthy; half were financially coping, meaning that they are struggling with some aspects of their financial lives; and almost one in five were financially vulnerable, meaning that they were struggling with all, or nearly all, aspects of their financial lives. Encouragingly, the share of those who were financially healthy, which had held roughly constant between 2018 and 2019, increased by four percentage points in 2020, likely as a result of the confluence of stimulus policies, debt relief measures, and consumer behavior changes resulting from the pandemic.
The Pulse reports also underscores the importance of viewing financial health as more than a snapshot of families’ current financial situation and looking at financial behaviors that build resilience. For example, although the 2019 Trends Report found that between 2018 and 2019 there was essentially no change in the share of individuals in each financial health tier, among those participating in both surveys over one in ten fell to a lower tier. Similarly, although as noted above there was some overall improvement in the picture in 2020 relative to 2019, still over one in ten respondents moved to a lower tier in 2020.
The disparities between the financial health of white respondents and people of color also emerge clearly from the Pulse data. In the 2020 Trends Report, for example, the percentage of white respondents who rated as financially healthy was more than double that for Black respondents and more than 1.6 times that for Latino respondents. The results were the exact inverse with respect to the financially vulnerable: Black and Latino respondents were twice and over 1.6 times more likely to be financially vulnerable than white respondents. The Black-white disparities actually have widened over the three years since we launched the Financial Health Pulse. Further, the percentage of financially healthy white individuals increased by five percentage points between 2018 and 2020, whereas the percentage of financially healthy Black individuals was essentially unchanged.
Earlier this year we conducted a supplemental Pulse survey that found additional evidence of growing disparities. For example, 50% of the financially vulnerable—a group disproportionately composed of people of color—reported that their financial situation had worsened during the course of the pandemic, as opposed to just 6% of the financially healthy. Similarly, Black and Latino respondents were roughly twice as likely as white respondents to report that since the start of the pandemic they had worried about running out of food or being unable to pay their rent or mortgage.
Other studies tell a similar story about the state of American’s financial health and the racial and ethnic disparities in financial resilience. For example, in a recent report on the Financial Resilience of Americans, the FINRA Education Foundation found that only 15% of people are what the report termed “Standing Strong” while 37% are “Living on the Edge” and another 14% are in the group labeled “Paycheck to Paycheck.” Among Black and Latino individuals, one in two are “Living on the Edge” and just over 5% are “Standing Strong,” one-fourth the figure for white individuals. Similarly, a recent report from the Pew Research Center finds that while almost half of all Americans report that their financial situation is only fair or poor, among Black individuals it is two-thirds. And in its most recent Making Ends Meet survey, the CFPB found that 30% of white individuals and 67% of Black individuals reported having had difficulty paying for a bill or expense in the previous year; for white respondents this represented almost a 20% decline over the prior year whereas for Black respondents this represented a slight increase year over year.
As the foregoing indicates, there is no dearth of data with respect to the financial health of those living in the United States. What is lacking, however, is a single, authoritative measure that is regularly reported on and that can drive a national conversation about how well families are doing and about the extent of our progress, if any, in improving financial health and reducing inequities that divide us on racial, ethnic, and other lines.
Today, most of what gets measured by the government, at least on a frequent cadence, are macroeconomic indicators of national economic performance such as the GDP, the CPI, the unemployment rate, or aggregate income, spending, savings, or debt levels (with savings being a derivative estimate.) Some of these raise complex methodological issues, as exemplified by the current debate about the true rate of unemployment. More importantly, most of these aggregate metrics are, at best, only loosely related to how ordinary Americans are faring, and those metrics obscure at least as much as they reveal about the state of families’ financial health. Yet because of the prominence of the monthly and quarterly reports of the traditional indicators, they are the ones on which policymakers are too often focused and that tend to drive public policy discussions.
To be sure, various statistical agencies have put a good deal of effort into measuring individual, household or family income on an annual or more frequent basis. Indeed, at least five separate government agencies issue periodic income reports, each with its own approach to measurement. That has allowed an important conversation about the growth of income inequality between those at the very top of the income ladder and the rest of Americans and between white families and families of color. But as already noted, family financial health is the product of the complex interaction among all parts of a family’s financial life. A family’s ability to effectively spend, save, borrow, and plan both influences and is influenced by physical health, emotional health, and the health of its community, among other factors. Thus, to measure financial health and make progress in improving it requires more than a measurement of income, however robust that measure may be; rather, it requires a more complex set of metrics that captures within individual families not just income but, at a minimum, spending, saving, and borrowing as well.
Until recently, the closest the government has come to such multi-dimensional reporting has been through the triennial Survey of Consumer Finances conducted by the Federal Reserve Board, the results of which are reported with a one-year lag after the data is collected. But as useful as those data are for researchers, the infrequency of those surveys and the delay in their release means that they are insufficient for establishing policy priorities and measuring progress in achieving well-defined goals.
In the wake of the 2008 financial crisis and the realization that traditional sources of government data were insufficient to understand the reality of Americans’ financial lives, the Federal Reserve Board began conducting an annual Survey of Household Economics and Decisionmaking (SHED) and producing annual reports on the Economic Well-Being of U.S. Households. The SHED uses a commercially available panel to explore individuals’ general economic well-being, with sections on income and consumption, employment, housing, education, health, banking, credit, and retirement planning. The 120-question survey and the resulting reports contain a wealth of valuable data including, for example, the finding in the 2020 report that one in five white Americans and one in three Black and Latino Americans report that they are “just getting by” or “finding it difficult to get by.”
However, in producing these reports, the Board has not endeavored to synthesize the disparate pieces of data collected through the SHED into an overall metric to inform public understanding of the state of families’ financial health. As a result, bits and pieces of the survey tend to be given outsized importance, such as the often-misunderstood statistic with respect to the percentage of people who would borrow or sell something to cover a $400 emergency expense.
The COVID-19 pandemic of 2020 provided another wake-up call about the need for more timely and relevant data on how households are faring financially. In April of 2020, the Census Bureau introduced the Household Pulse Survey to fill the gap; this survey initially was done on a weekly basis and is now being conducted biweekly. This novel research illustrates the importance of going beyond aggregate numbers to collect data about individuals’ actual experiences and perceptions—asking, for example, about whether respondents’ have been able to procure sufficient food for their family and pay their mortgage or rent. As a stunning example, while the Commerce Department’s report on Personal Income and Outlays for March 2021 provided a rosy report on national income, spending, and savings in the aggregate, the Household Pulse Survey for the last two weeks of March found that almost three in ten households—and over four in ten Black and Latino households—were experiencing difficulty in paying for their usual household expenses. (Even those numbers were an improvement from the first two weeks of March when over a third of all households and almost half of Black and Latino households found it difficult to pay their usual household expenses.)
But as useful as the Census Pulse is in understanding aspects of the current economic situation, it is not intended to be a tool for assessing overall financial health. Its stated purpose is to understand the “ways in which people’s lives have been impacted by the pandemic.” Thus, it asks primarily about the respondents’ experiences over the preceding seven days and their expectations for the ensuing month or two. Furthermore, even as a means of measuring the pandemic’s effects, the roughly 40 separate tables that the Census releases every two weeks are overwhelming in their detail and lack clear conclusions.
If financial health is to be placed at the very center of economic policy, there needs to be a simple and easily-understood way of measuring and talking about financial health and a data gathering and reporting system that puts that measure at least on a part with more conventional economic measures such as the GDP or the rate of inflation. That in turn requires three key steps:
Defining a set of key indicators of financial health;
Constructing a straightforward and reliable composite index for measuring the financial health of families and grouping them within financial health tiers; and
Designing and implementing a data collection and reporting system that makes the state of financial health and inequities in financial health salient for the public, policymakers, and thought leaders.
We discuss each of these steps in turn.
Defining financial health indicators. To create an index to measure financial health first requires defining a set of robust indicators of financial health in much the same way as physicians have developed indicators of physical health such as blood pressure, cholesterol level, heart rate, and the like. These indicators could include what accountants and economists term stock and flow data points—that is, point-in-time and changes-over-time data points. For each indicator, it would be necessary to define a healthy and unhealthy range and a gray or borderline area, much as we do for physical health indicators.
Constructing a composite index. Each of these indicators, standing alone, would reveal a piece of the mosaic that makes up a family’s and, in the aggregate, the nation’s financial health. Reporting that uncovered, e.g., the share of families without a sufficient savings buffer or with an excessive debt burden would represent a significant improvement over the current, aggregate-level reporting of national savings and debt levels or the reporting of the average savings rate and debt burden. But to measure families’ financial health and the disparities that exist requires bringing these pieces of the mosaic together at the level of the individual or family through a composite index—that is, a single number which could be calculated for each family—which could then be used to place individual families into financial health groupings or tiers. That in turn would make it possible to measure the state of the financial health of the various communities that together make up the nation’s financial health.
Data collection and reporting. Once the indicators of financial health have been determined, a scale constructed and validated, and financial health tiers defined, the Census Bureau could begin conducting quarterly surveys, either as a supplement to the Current Population Survey or as a stand-alone data collection along the lines of its current Household Pulse survey, to obtain the data needed for financial health reporting. Administrative data collected by the IRS or the Social Security Administration could be merged with the survey data as appropriate to generate financial health scores. Census could then create quarterly releases with respect to both the indicators and the composite scores, reporting, at a minimum, the distribution of families by financial health tier in the aggregate and for discrete populations, especially historically discriminated-against or otherwise marginalized communities. The ultimate objective would be to generate regular reports on the state of our financial health that receive the same fanfare as typically accompanies, for instance, the release of the quarterly GDP, so that economic progress would be evaluated in terms of improvements in the ability of families to build resilience and thrive, especially among historically disadvantaged communities.
We see four principal benefits of developing a systematic effort to measure financial health along the lines outlined above.
Holistic measurement of macro and micro trends: The first and most obvious benefit is that, like any good diagnostic tool, financial health measurement could shed a spotlight on overall trend lines—providing a robust and reliable means of answering Ronald Reagan’s penetrating question—and, moreover, a means of identifying communities whose financial health is poor, deteriorating, or failing to keep pace with overall For example, at scale a well-designed program of financial health measurement, in addition to measuring financial health across racial and ethnic lines, could provide insights into how those living in rural areas or inner cities or areas of persistent poverty are faring and whether their financial health is improving in tandem with other parts of the country. Such a program likewise could provide insights into particularly vulnerable populations such as renters, the elderly, those caught up in the criminal justice system, those with disabilities, or those with limited English proficiency.
Improved assessment of economic policy: Second, and relatedly, a robust system of financial health measurement could drive economic policy, and public discourse regarding such policy, for years to come. Each administration could define—indeed should be called upon to define—its goals with respect to improving financial health and closing financial health gaps. Each administration would be able to measure its progress in achieving its goals and to make mid-course corrections as needed. Perhaps most important, each administration could be held publicly accountable for what has, or has not, been accomplished to improve financial health for all on its watch based upon clear and objective measures.
Greater precision in policy design and execution: Third, over the longer term, a systematic program of measuring financial health could potentially alter the way in which a range of government programs are designed by providing a more effective tool for crafting eligibility criteria and distribution formulas, for instance. Quite commonly, new programs designed to reduce inequities target assistance to families based upon their income relative to a state or area median. For example, the recently-enacted American Rescue Plan creates a homeowners assistance program to provide support for needy homeowners in making mortgage, utilities, or insurance payments with a requirement that at least 60% of the funds go to homeowners with incomes at or below 100% of the area or national median income. A metric that measures financial health could provide a more nuanced and ultimately more precise method for targeting those families in greatest need.
Private sector accountability: Fourth and finally, a government program of the scale we are envisioning could provide a set of benchmarks against which private-sector institutions and nonprofit organizations would be able to compare the financial health of their employees, customers, and clients. Such measurement, conducted in a manner that safeguards individual privacy, is a necessary first step to enable these organizations to develop effective financial wellness programs of their own—within their own workplaces or across, e.g., a financial institution’s customer base, a health care system’s patients, or a college or university’s student body. Over the longer term, an authoritative means of measuring financial health could lead to well-defined expectations of these and other institutions in terms of their impact on the financial health of their key stakeholders. The Financial Health Network has worked with dozens of companies and organizations over the past five years in efforts to conduct firm-specific measurements of financial health. Our experiences suggest that a government-backed measurement program with national benchmarks would catalyze more private sector activity.
The vision we have proposed cannot be achieved overnight. But we do believe that it can be realized within the next four years with the right level of intensity and focus.
The research that the Consumer Financial Protection Bureau conducted in constructing a financial well-being scale, along with that of the Financial Health Network and other researchers and private parties who have built similar indices, can provide a solid foundation for defining the indicators and building the kind of index we propose. At the same time, for a financial health index to gain the credibility and acceptance that we envision, more work—and a more inclusive process—will be needed to define the indicators that should go into the composite index and the weight to be attached to the indicators in order to create and validate a financial health scale and associated financial health tiers.
For this to happen with the speed necessary to meet the moment, it is imperative for the president to assign responsibility for building a system of financial health measurement to a senior-level official within the White House such as the Chair of the Council of Economic Advisors, the Director of the National Economic Council or the Director of the Domestic Policy Council. That official would in turn be responsible for engaging experts from across the government, along with a group of outside advisors, to provide technical expertise in developing the indicators, the index and tiers, and the data collection and reporting system and to do so within an agreed-upon time frame, recognizing that the perfect can be the enemy of the good and that once launched there will be opportunities to improve the methodology over time. The National Academies of Sciences, Engineering, and Medicine could play a key role in supporting this work.
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At the same, it is not necessary to await the development and validation of indicators and a scale along the lines discussed above to begin making progress in collecting and reporting on data relevant to assessing financial health and on the gaps—indeed chasms—that exist across racial and ethnic lines. Rather, there are five steps that could be implemented in the near term to improve public understanding of financial health.
Expand the Current Population Survey’s Annual Social and Economic Supplement to collect information on savings and debts relative to income. Although the CPS ASEC has been criticized for undercounting households at both ends of the income spectrum,3 it nonetheless remains the premier instrument for collecting information with respect to household income and certain categories of expenses. It creates a natural vehicle for also collecting information on households’ liquid savings, retirement savings, debt levels, and debt payments, all of which can then be related to household income. These data elements would provide a more complete picture of families’ financial health than income reporting alone.
Incorporate validated questions of subjective well-being into, or linked to, the CPS Many of the tools that have been developed to measure financial well-being use questions that inquire about families’ perceptions and subjective experiences. In addition to collecting data on savings and debt, Census also could, in the near term, incorporate into the CPS ASEC (or potentially a separate data collection that could be linked to it) questions taken from the SHED, the CFPB’s financial well-being scale, or some other existing instrument for measuring financial health such as the Financial Health Network’s Financial Health Score or the instrument that the Commonwealth Bank of Australia (in collaboration with the Melbourne Institute) has developed. This could inform understanding of the relationship between these subjective indicators and more objective measures.
Conduct statistical analyses to develop and report on composite It would not be sufficient to report separately on income, savings, debt, or subjective well-being. As discussed above, what matters in the lives of families is the combination of these (and other)variables. Even before developing its FinHealth Score, the Financial Health Network used survey data to define three financial health tiers (Healthy, Coping, and Vulnerable) and sub-segments within each tier. The FINRA Investor Education Foundation has likewise developed a four-tier topology (Standing Strong, Holding Steady, Paycheck-to- Paycheck, Living on the Edge) using data from its triennial Financial Capability Study. That topology in turn parallels one the Commonwealth Bank of Australia-Melbourne Institute developed (Doing Great, Getting By, Just Coping, Having Trouble) in conjunction with its Financial Wellbeing Scale. We similarly recommend that, through cluster analysis or other statistical techniques, Census use the data collected through the CPS ASEC to define three to five groupings and report on the distribution of families within those groups and on changes in those distributions over time.
Report and highlight results by race, national origin, and other key demographic groups. The CPS routinely collects demographic data and reports disaggregated results by racial, ethnic, and other key demographic variables. But it is not enough for these results to be buried in tables accompanying data releases while the headline speaks in terms of national averages. Rather, each report needs to highlight findings with respect to the equity gap, including, e.g., what percentage of Black, Latino, and white families as well as families from other racial and ethnic minorities are found in each tier or group and year-over-year changes in the gaps between those groups.
Publish the microdata for use by outside experts. Academics and other researchers can play an important role in expanding our understanding of financial health by mining the data collected by the government. They can, for example, explore alternative means of defining financial health and of grouping households; examine trends not apparent from simple comparisons; and identify subpopulations missed by the government’s periodic reports. And they may find ways to combine these data with other data sources to further refine the understanding of the state of our financial health.
As President Biden’s executive order on equity states, “A first step in promoting equity in Government action is to gather the data necessary to inform that effort.” If financial health is a national goal, we need to be able to measure the share of families who are financially unhealthy or struggling. If we are committed to reducing the equity gaps between whites and historically marginalized communities, we need to be able to measure disparities among these different groups. Measurement will not, in and of itself, achieve equity, but robust measurement is essential if we are to know where we stand, where we are heading, and how to get closer to our desired destination.
The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.
Universal bank accounts necessary for families to bank on Child Tax Credit
The expansion of the Child Tax Credit (CTC) enacted into law as part of the American Rescue Plan should provide major benefits to millions of families, but there’s a catch: people need to be able to receive the money. The COVID-19 pandemic demonstrated that Uncle Sam struggles to get money to families. Stimulus payments were sent out slowly, and despite 95% of American families having a bank account, the Treasury Department sent 70 million paper checks and plastic debit cards. The problem was most severe among low-income individuals, who had to wait longer and were less likely to have the money deposited in their bank account. The CTC payments, which will be sent out in monthly installments through the end of the year, start in only two months. We have precious little time to fix this.
The simplest and smartest fix is to establish universal, low-cost bank accounts. While the unbanked make up only 5% of Americans, this obscures the stark racial disparities. Fourteen percent of Black families and 12% of Latino families are unbanked, compared to just over 2% of white families. Why do people not have bank accounts? The answer is, they are structured to be quite expensive if you are poor.
By a large margin, unbanked households’ main reason for not having an account is the high cost of basic bank accounts. Many banks implement minimum balance requirements, which low-income individuals cannot meet. Overdraft fees disproportionately target the most vulnerable. About one in twelve bank account holders are heavy overdrafters, racking up more than $300 a year in overdraft fees. These fees help subsidize the ‘free checking’ that those with a cash cushion of over $1,000 enjoy. Faced with expensive basic banking, low-income households turn to alternatives like payday loans and check-cashing services. Underserved households spend nearly one-tenth of their annual income on fees and interest from such services, on average. This figure may rise if CTC payments are not distributed smartly: $66 million of the first round of COVID relief payments ended up in the hands of check cashers.
Universal accounts expand access to the financial system and make government payments more effective by eliminating costly fees and delays. The most straightforward solution is to require banks and credit unions to offer low- or no-cost accounts. These institutions are chartered by the government and have a duty to serve their communities. Providing a basic, low-cost account that is accessible to all community members falls within this.
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Universal accounts have several key features, including minimal associated fees, no overdraft fees and no minimum balance requirements (an example of an acceptable fee is a low monthly maintenance charge). Universal accounts also include standard services, like mobile banking, online and automatic bill-pay, and savings incentives and tools.
Universal account access is not just a pie in the sky concept. Cities for Financial Empowerment Fund’s Bank On initiative partners with banks and credit unions, creating low-cost, certified accounts. The FDIC Safe Account model is another path to the same goal. The American Bankers Association recently urged all banks to offer Bank On-certified accounts. Congress or federal regulators need to go one step further and require that all banks and credit unions offer these accounts.
Some banks and credit unions will likely push back against this idea, concerned about losing profit. Overdraft fees are a source of pure profit for banks; one bank executive even named his yacht Overdraft. For a few financial institutions, overdrafts constitute the majority of the banks’ profit. That is troubling both for the consumers being targeted and for the regulators who allow it.
Solving the account problem is a vital first step, but it is insufficient. We live in a world where Amazon can get anything to your door in under 48 hours, but it takes Uncle Sam six days to get money into your bank account. Payment instructions for the first round of stimulus checks went out on a Friday, but funds didn’t arrive until Wednesday. That may be fine for those who can afford to wait, but time is money, especially for people living on the edge. The Child Tax Credit is targeted to families closer to that edge.
Demand for payday loans and check-cashing services is driven by this slow payment system. The Federal Reserve has announced a plan to implement real-time payments but does not plan to have it operational until 2023, at the earliest. By then, the entire expanded CTC is scheduled to be over. The Treasury Department does not have to send money through the Fed’s current outdated system. Treasury could send it in real time through the Clearing House’s Real-Time Payments (RTP) Network, which currently reaches 56% of Americans’ bank accounts.
Congress took a bold step requiring monthly payments to 48 million families through the CTC. Giving families who are living at or near the edge monthly payments, as opposed to waiting until tax time, is wise. However, it will not work as intended unless the US Treasury is able to pay people quickly and efficiently. Establishing universal accounts through the existing banking and credit union system, coupled with real-time payments, is the simplest solution. In just two short months, we need to have a system in place to ensure that low-income families are not, once again, left behind. Universal accounts are the solution.
Myrto Karaflos is a Senior Policy Associate at Prosperity Now, a nonprofit organization. Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article. The views expressed in this piece are those of the authors and do not reflect the position of Brookings or Prosperity Now.
Diversity within the Federal Reserve System
A growing chorus has called on the Fed to diversify its ranks at all levels to reflect better the heterogeneity of the United States. So far most of these efforts speak to the diversity of the Fed’s principals, namely, the members of the Fed’s Board of Governors and the presidents of the twelve Federal Reserve Banks. In this study, we dig deeply into a vital part of Federal Reserve governance that has so far not received the same sustained attention: the directors of the Federal Reserve Banks, those responsible for choosing the presidents of the Federal Reserve Banks in the first instance. We find a staggering homogeneity among them, with only recent signs of diversification. They are overwhelmingly white, overwhelmingly male, and overwhelmingly drawn from the business communities within their districts, with little participation from minorities, women, or from areas of the economy—labor, nonprofits, the academy—with important contributions to make to Fed governance. We conclude by recommending that the Federal Reserve System—the Board of Governors, the Federal Reserve Banks, and the member banks that belong to the system and vote for some of these directors—make their selection processes more transparent for outside evaluation such that progress (or lack thereof) can be better measured and attributed.
Introduction
The Federal Reserve System, the collection of institutions that form the central bank for the United States, has a diversity problem. This has long been obvious at the top of the organization, among the members of the Fed’s Board of Governors and the presidents of the Federal Reserve Banks (who constitute, together, the Federal Open Market Committee, the group that decides the nation’s monetary policy).1 These key economic policymakers, among the most important in the nation, are overwhelmingly white and male. There have only been three Black members of the Fed’s Board of Governors, only one Black Federal Reserve Bank President, and only three nonwhite Federal Reserve Bank presidents in the entire system’s history. There is also a sense that these principals are overwhelmingly promoted from within, creating a risk for groupthink and intellectual homogeneity.2
This homogeneity runs deep within the Federal Reserve System, including at the staff level.3 Less attention, however, has been paid to another extraordinarily important part of the Federal Reserve System: the directors of the twelve Federal Reserve Banks. Since the Fed’s inception in 1913, the directors were designed to be private-sector gatekeepers for the Fed’s extraordinary power, as a compromise between public and private influence over the regulation of the nation’s money. The Federal Reserve Act makes the diversity of those directors clear: these directors are to “represent the public . . . elected without discrimination on the basis of race, creed, color, sex, or national origin, and with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.”4
This provision, added in large part in 1977, is intended to rectify historical exclusions on a grand scale. This report provides something of a report card on that effort. Using the 106 publicly available annual reports of the Board of Governors from 1914 through 2019, we compiled a database of all individuals who have served as Federal Reserve Bank directors. Beyond the basic information found in the annual reports, we expanded the biographical database to include race, gender, profession, education, age, time spent in position, and whether or not the directors later held a position on the FOMC.
This biographical database significantly expands, in time horizon and scope of diversity measures, two important and invaluable studies done in the last decade. First, the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), the financial regulation reform legislation passed in response to the financial crisis of 2008, included a provision requiring the Government Accountability Office conduct a review of the governance of the Federal Reserve Banks.5 Their report, published in October 2011, covered race, gender, education, and industry of directors between 2006 and 2011. Based on the report’s review, the GAO issued several recommendations aimed at “enhancing the diversity of the Reserve Bank boards, strengthening policies for managing conflicts of interest, and enhancing transparency related to board governance.” The second study, conducted jointly by Fed Up and the Center for Popular Democracy, covered race, gender, and industry between 2013 and 2019, concluding that “the Fed’s pace of change is entirely too slow.”6 Both made significant contributions to the public dialogue around diversity at the Fed and included recommendations that the Fed broaden recruitment of directors and increase transparency of the selection process and governing documents of the directors.
Our database expands the timeline of the above-mentioned databases back to the very founding of the Fed and broadens the scope of diversity measures. This allows us to explore in this report, for the first time, the full breadth and history of diversity in this critical leadership role at the Fed.
The results are not good. On race, we see that the first nonwhite directors were not appointed by the Board of Governors until the 1970s. Even as late as the 2010s, nonwhite directors represented less than 10% of the total directors in any given year. Representation of female directors tracks a similar, though slightly less dire, pattern, with the first females also appointed in the 1970s, reaching 10% by the late 1990s, and increasing more quickly in the 2010s to 37% in 2019.
Sectoral representation also suggests important trends that have not been fully understood or analyzed. First, directors from manufacturing backgrounds decreased as a share of directors overall since the 1940s. Second, there is a substantial increase in the portion of directors from the nonbank financial sector since the 1980s. These are directors who are explicitly meant to represent sectors besides finance.
Third, and perhaps most surprising, only 5 percent of directors have a PhD in economics—inarguably an important credential for their main task of evaluating the competence of central bankers—since 1970, when the first Fed Chair with a PhD was appointed. In general, economists are arguably overrepresented at the Fed’s senior ranks, but at the level of Fed directors, they are underrepresented, potentially so much so that their central governance purpose becomes much harder in evaluating candidates.
Given the failures by many measures of diversity, some have argued for much more transparency in the selection process for Federal Reserve Bank presidents.7 We agree. More specifically, we urge the Fed—and, where necessary, Congress—to develop and disclose a more detailed framework through which Federal Reserve Bank directors are selected. This proposal is not simply an argument in favor of transparency for transparency’s sake, but a recognition that diversification of candidate pools and appointments requires substantial effort and strategic thinking. This transparency will allow outsiders to participate in those efforts and evaluate the results—to credit the Fed’s successes and exercise accountability for the failures.
The report is organized as follows. Part I provides background on the Fed’s governance and the changes that Congress and the Fed itself have made over the years to increase director diversity. Part II, the bulk of the report, presents and describes the data we have collected to describe the path of diversity at the Federal Reserve. In particular, we focus on four elements of that diversity from the database: race, gender, occupation, and education. The first two have received most of the attention in recent discussions; the last two much less so. Part III concludes with a more fully developed program for reform. Two appendices available for download present more data on race and gender, disaggregated by Federal Reserve Bank.
I. The Governance of the Federal Reserve
The Federal Reserve System is a governance curiosity. The “federal” in its name is something of a misnomer. There is no state-national balance in the system, but instead a balance between Fed regions—twelve Federal Reserve Districts that were designed at inception largely by Democratic politicians in a somewhat partisan exercise that often bisected specific states—and the Washington-based Federal Reserve Board.8 The Board was initially chaired by the Secretary of the Treasury and included other presidential appointments that required Senate confirmation, for political accountability purposes. The Reserve Banks, one for each Federal Reserve District, would have a President (earlier styled a “Governor”), appointed by its directors. Congress divided those directors into three classes: Class A directors would be “chosen by and be representative of the stock-holding banks,” those banks that joined the Federal Reserve System. Class B directors would be “actively engaged in their district in commerce, agriculture, or some other industrial pursuit,” and would be elected by stock-holding banks in the same manner as Class A directors. And, finally, Class C directors would be “designated by the Federal Reserve Board,” at least two of whom would be individuals of “tested banking experience,” but could not be an employee of a stockholder bank.9 The purpose of this intricate arrangement was in the spirit of checks and balances: the public needed a Federal Reserve Board for political accountability, but also the private Federal Reserve Banks to ensure that that accountability did not turn the enterprise into a purely partisan one.
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In 1935, the Federal Reserve System was reorganized into the modern version with a Board of Governors in Washington, DC and a Federal Open Market Committee that consists of both Fed Governors and Reserve Bank Presidents. The structure of the Reserve Bank directors remained the same.
Congress has updated this somewhat byzantine governance framework with respect to Fed directors at various important points during the Fed’s century. Two changes are especially important. First, in 1977, Congress updated Section 4 to include an anti-discrimination provision for each class of directors. These directors would thenceforth be selected “without discrimination on the basis of race, creed, color, sex, or national origin.”10 The Class B and C directors were to “represent the public” and would also be selected “with due but not exclusive consideration to the interests of agriculture, commerce, industry, services, labor, and consumers.” As in 1913, the banks would elect both Class A and Class B directors and the Board of Governors would appoint the Class C directors.
The other major change, one of director responsibility rather than director selection, came in 2010 as part of Dodd-Frank. After 2010, the president and first vice president of the Federal Reserve Banks would no longer be selected by vote of the full board of directors, but “shall be appointed by the Class B and Class C directors of the bank [the nonbanker directors], with the approval of the Board of Governors.” The role of the Class A directors, the bankers, in participating in the presidential search remains uncertain but not legally forbidden.
Beyond these statutory parameters, the other formal law governing the appointments process for Federal Reserve directors is about the voting process. There is little formal law governing who can be appointed, although the Fed does publish a document outlining the “roles and responsibilities of Federal Reserve Directors” that adds some gloss to the statute.11
Most importantly, there is no mechanism to ensure diversity along any parameter beyond a prohibition against discrimination (with no enforcement or information-gathering mechanism) and the relatively weak endorsement of “due but not exclusive consideration” for various constituencies beyond banking.
II. Evaluating the Fed’s Diversity
In June 2020, during a regular FOMC press conference, Fed Chair Jay Powell confronted the problems of racism and the opportunities for diversity directly. “I speak for my colleagues throughout the Federal Reserve System when I say that there is no place at the Federal Reserve for racism.” He added: “These principles [of non-discrimination] guide us in all we do, from monetary policy, to our focus on diversity and inclusion in our workplace, and to our work to ensure fair access to credit across the country.”12
Powell and his colleagues have continued to emphasize these issues, including within the Federal Reserve System itself. Shortly before the following FOMC press conference, a former Board staff economist published a blistering public letter that demonstrated poor diversity performance in the economics field broadly and at the Fed specifically.13 When asked about the letter, Powell further acknowledged, “there’s been a lot of pain and injustice and unfair treatment that women have experienced in the workplace – not just among economists, but among economists at the Fed…the Fed could have done more and should have done more.”14
Powell isn’t the lone voice from within the Fed calling for the institution to do better. Federal Reserve Bank of San Francisco President Mary Daly spoke movingly and personally about the gender discrimination she faced as a junior employee of the Federal Reserve System.15 Raphael Bostic, President of the Federal Reserve Bank of Atlanta, the first—and as of 2021, only—Black Fed president, has given three speeches in the last six months focusing on the importance of diversity at the Fed and in the broader economy.16 Scholars have also started focusing more on failures of diversity within the financial regulatory community, including important studies published by Brookings by Aaron Klein, Chris Brummer, and David Wessel.17
Methodology
As important as these conversations are, key mechanisms for improving diversity within the System remains in the hands of these Reserve Bank directors. To understand better the problem that Powell, Daly, Bostic, and many others have identified, we take a long view to outline just how grave the problem is that the Fed is confronting.
Using the 106 publicly-available annual reports of the Board of Governors from 1914 through 2019, we compiled a database of all 2,607 individuals who have served in unique positions as Federal Reserve Bank directors.18 The information on the annual reports include only district, city/state, employer, and board leadership position. From board position we were able to garner two pieces of information.
Beyond the information available on the annual reports, we expanded the biographical database to include: race, gender, profession, education, age, time spent in position, and whether or not the directors later held a position on the FOMC. With help from a team of exceptional research assistants from the University of Pennsylvania and elsewhere, we reviewed historical materials to catalogue this additional biographical information. Our primary sources include: newspaper archives, census records, genealogical databases, and corporate profiles.
We were able to find information on the diversity measures listed above for the following proportions of directors in the database: a white/nonwhite race indicator for 97.5 percent of the directors, a male/female gender indicator for 100 percent of the directors, the sector of 100 percent of the directors, and the terminal degree for 72 percent of the directors.19
Dividing individuals into a binary white/nonwhite category is a challenging pursuit that oversimplifies reality, particularly within the Latino/Hispanic community.20 For this database, we prioritized information and sources as follows: (1) self-identification in a primary source, (2) identification in a secondary source, (3) national origin/heritage in primary or secondary sources (all Latin/Hispanic countries from the Western hemisphere counted as nonwhite), and (4) subjective determinations based on director photographs. The last and admittedly least objective category constituted less than 10 percent of the nonwhite directors we recorded.
We do not include political affiliation, another important measure of diversity, in our analysis. However, Caitlin Ainsley, a political scientist from the University of Washington, conducted a review of political campaign donations from the Reserve Bank directors between 1980 and 2015, cataloguing donations from 71 percent of the directors. Ainsley’s study suggests that along this important dimension there is substantial heterogeneity among the directors, a heterogeneity that is less apparent in the areas we assess.21 These results suggest that the challenges to diversify the directors, while very real, are not insurmountable; whatever process is currently in place yields variety at least along this one dimension, suggesting a path ahead along others, too.
Race
Figure 1 represents the entire history of the Federal Reserve System and records the number of nonwhite directors since its founding in 1913 through 2019.22
We do not observe a trend of inclusion of nonwhite directors until into the 1980s, and even then the inclusion of racially-diverse directors is mostly a function of the Class B and C directors, the nonbankers. Even more worrisome than the total number of nonwhite Class A directors is that this number, never large, has actually decreased recently.
This is consistent with the known lack of gender and racial diversity in the US banking industry more broadly. In February 2020, the US House Financial Services Committee published a review of diversity based on a survey of the 44 largest banks in the country.23 The report indicates that while diversity in the industry has increased at the entry- and mid-levels, executives and other senior leaders remain overwhelmingly white. It is thus credible that the Fed’s diversity problem for Class A directors remains closely tethered to the diversity problems for banking in general.
We can observe more differences when we break racial diversity by Federal Reserve Bank. Figure 2 represents the first year that each Federal Reserve Bank appointed its first non-white director, beginning in 1972 (Philadelphia and San Francisco) and ending in 1992 (Kansas City).
Appendix A goes further to break down the inclusion of nonwhite directors by each of the Federal Reserve Banks. The numbers are not promising: there are significant periods for each of the Federal Reserve Banks where there are not more than one or two nonwhite directors at a time. Only Chicago, Dallas, and San Francisco have had three or more nonwhite directors on any sustained basis. It appears suggestive at least that the 1977 law prohibiting discrimination had little effect in changing the racial composition of these boards.
Gender
The (lack of) gender diversity within the Fed’s boards of directors is a similar problem to that of race, as the first female directors are (1) nonbankers and (2) appointed in the 1970s, followed in the 1980s by the election of the first few female bankers. However, efforts to increase female representation has been far more successful than has been the case for racial diversity. Female directors represented 37 percent of all directors in 2019, across all Classes (though the numbers are still better for nonbankers). Figure 3 represents the Fed’s history with female directors across all districts.
Figure 4 represents the first year that female directors were appointed, from 1977 (Dallas, San Francisco, St. Louis, Atlanta, and Philadelphia) to 1988 (Cleveland).
Appendix B provides district-by-district analysis of female director participation. The Reserve Bank boards are, in general, not close to gender parity, with the important exceptions of the Federal Reserve Banks of St. Louis and Minneapolis who each had five female directors in 2019. Some districts remain far from parity; only two of the nine directors on each of the Chicago, Dallas, and San Francisco boards are female. Here, differently from the experience of racial diversity at the boards, our evidence is at least consistent with the view that the 1977 law had an impact—perhaps even a major impact—on the increase in gender diversity.
Similar to racial diversity, it is the case that finance in general has a problem, especially at the senior level, for gender parity. The Fed is not alone in this regard. What is remarkable here is that the Class B and C directors are explicitly not expected to be drawn from finance. Even so, for the most part the Fed struggles in this regard and has done so for most of its history.
Research by a Richmond Fed economist published in 2017 suggested that it would take over 30 years to reach gender parity for Reserve Bank directors at the current pace.24 Janet Yellen, current Treasury Secretary and former Fed Chair, explained why this matters at a September 2019 Brookings conference. She highlighted the basic fairness of increasing diversity, the better performance of diverse teams, and the “wasted talent” if institutions don’t increase diversity.25
Sectoral representation
We turn now to sectoral representativeness among the directors. Figure 5 illustrates the trends over time of the top 10 sectors.
Given that Class A directors are explicitly bankers elected by bankers, it is perhaps unsurprising to see their predominance. But a trend since roughly 1980 includes a substantial and growing number of non-banking finance representatives as the third-most represented single group, after banking and manufacturing. The influence of finance on the Reserve Banks’ governance remains very strong, even among the classes of directors meant to represent other interests.
Missing almost entirely from this equation, despite its inclusion in the list of statutory considerations, is labor. Figure 6 illustrates the absence of labor participation in Fed governance.
Figure 7 puts this data differently, outlining labor participation by each Federal Reserve Bank.
It is of course the case that organized labor is not the exclusive representative of working women and men, and never has been. Indeed, there is a long-term, well-documented secular decline in labor representation, especially in the private sector. The Bureau of Labor Statistics has tracked union membership in the US since 1980 and the percent of public sector union membership has only dipped from slightly above 35 percent to slightly below it. The decline in private sector union membership, on the other hand, has decreased steadily from nearly 17 percent in the 1980s to 6 percent last year.26
But even taking the general private sector decline in union membership into consideration, it is remarkable how minimal labor participation is in Federal Reserve governance, with few exceptions.27
Education
We have also investigated education attainment for the directors. Figure 8 tracks terminal degrees over time.
Note important gaps in our data—the further back we go, the less concrete the information. (Also, note that we use the JD degree as a substitute for the LLB, which did not become standard until the late 1960s.)
Notable here is the relative lack of participation on the boards of directors from academic economists, a reversal of a trend for the heads of the Reserve Banks themselves, where a majority of newly appointed Reserve Bank Presidents since the 1980s have had a PhD, 80 percent in Economics.28 The Reserve Bank boards of directors therefore may be the one place where economists are under-represented relative to their importance to Fed governance.
This lack of representation for economists poses something of a governance quandary for the Reserve Banks and their directors. If the directors’ primary responsibility is to select the presidents of their Banks, and the trend for central bankers is increasingly toward sophistication in graduate level economics, is it plausible for these directors—the overwhelming majority of whom do not have this training—to assess the merits of these candidates? We post the question but cannot answer it in this report. Suffice it to say that this mismatch raises more questions than this about the suitability of the present governance arrangements.
Figure 9 describes the area of academic focus for the directors.
These trends are consistent with the professionalization of private and public bureaucracy generally over the 20th century. Also, given the deep pockets of uncertainty, not much can be drawn about these differences on the basis of this data alone. They do invite further research, however, especially given, again, the relative dearth of economics as a field of study for these directors.
III. Implications and Reform
The foregoing data suggest four conclusions that are important to consider as the Fed seeks to diversify participation in the System.
First, the road ahead for diversifying along race and gender for the Reserve Bank directors will be challenging, if history is a guide. To be fair, this is not a problem for the Federal Reserve alone and nothing in this report supports that conclusion. We do not know how well or poorly other central banks, other government bureaucracies, or other private institutions have done on these same parameters.29 But if the goal is even representation—meaning, that the corps of Fed directors maps even passingly the population that these directors are meant to represent—then there is a long way to go.
Second, it is very difficult to believe that “due … consideration” has been given to labor in the selection of Class B and C directors, despite that statutory instruction. The participation of individuals with backgrounds in labor is a very small proportion of the entire corps of directors, and even then it is a recent phenomenon focused in some districts but not others. This failure is even more striking given the Fed’s recent prioritization of its full employment mandate over its inflation mandate.30
Third, given the nature of the task for Reserve Bank directors—that is, the selection of central bankers who will make monetary policy—it is stark how little educational background in economics we observe, even in recent years where our data is more complete. Although economists are potentially over-represented in the highest reaches of the Fed (and in other central banks), they appear significantly under-represented as participants in Fed governance.
Fourth, director diversity is important for its own sake but also for the ways that that diversity will influence the roles that these directors play in shaping the agendas of the Reserve Banks, the Federal Open Market Committee, and even the general discourse around central banking in the United States and beyond. There are curiosities in the data, to be sure: the Federal Reserve Bank of Cleveland is the first Reserve Bank with a female president, the last with a female director. Diversity at the level of the directors will not solve diversity issues elsewhere in the System. But it will be an important start with lessons learned that will inform the processes throughout the System.
The Fed has already made public commitments to improving its challenges with diversity. We applaud those efforts. But to rectify a history as homogenous as this requires something more, especially given the byzantine governance structure and the limits that that structure imposes on centralized decision-making.
We therefore make the following three recommendations that, in order of ease of implementation.
The Fed’s Board of Governors should make public the processes used to select Class C directors, including opening up that process for application and the publication of statistics regarding various aspects of such applications.
The Federal Reserve Banks should, together, implement “best practices” for the selection of Class A and B directors such that the member banks that elect those directors can be guided by better processes.
Congress should consider discarding as archaic the classified boards entirely and permit a more accountable mechanism for Fed governance that puts governance more squarely in the hands of political actors who can explain, defend, and answer for the successes and failures of those mechanisms.
Conclusion
The Federal Reserve System has never been the model of clear governance. But even short of a dramatic overhaul, it can become better. Indeed, just one year after he became the first Black Governor of the Federal Reserve in 1966, Andrew Brimmer commissioned an internal report on the Reserve Bank directors, concluding that the Fed “should have a better understanding of the characteristics of this group of public servants.”31 This is as true today as it was 55 years ago. Our report’s biographical database and the analysis we have conducted herein serves as an answer, a half-century later, to Brimmer’s charge.
If past is prologue, the future for Fed diversity at this important level is bleak. Fortunately, there is great hope that the past will in this case remain in the past. Directors in each class essentially all serve for a limit of six years. In relatively short order, then, each of the twelve Reserve Bank boards of directors can be remade. This means progress can be made quickly, if prioritized. It is our hope that the data and recommendations in this report will facilitate that transformation.
The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are currently not an officer, director, or board member of any organization with an interest in this article.
Congruent financial regulation
The turmoil that roiled financial markets after the first COVID-19 lockdowns in March 2020 underscores the need to better coordinate regulation of economically similar financial activities, whether inside or outside the banking system, according to a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on March 25.
The paper—Congruent financial regulation by Andrew Metrick of Yale University and Daniel K. Tarullo of Harvard University—notes that banks last year proved to be a source of stability thanks to the more-rigorous standards enacted after the 2007-2009 financial crisis. But, they write, financial markets and less-regulated non-bank institutions (such as hedge funds, brokerage firms, and money market mutual funds) remain vulnerable in the United States’ patchwork regulatory system, so much so that at the start of the pandemic “the Federal Reserve felt it had no choice but to use its emergency powers to create an astonishing range of market-supporting measures.”
Non-bank financial institutions and associated funding markets “constitute a large and growing component of the global financial system,” the authors write. “But regulation has not kept up with this growth.” For instance, money market mutual fund participation in repo transactions (a form of short-term borrowing collateralized by Treasury securities) cleared through the lightly regulated Fixed Income Clearing Corporation has risen from nothing before 2017 to more than $250 billion in early 2020.
Congress appears unlikely to make regulation more consistent by consolidating financial regulatory agencies or by strengthening the authority of the Treasury-led Financial Stability Oversight Council (FSOC)—and both actions would raise significant policy issues in any case, they authors write. Thus, the agencies should collaboratively work toward an “overarching congruence principle.”
“Our proposed principle would be applied through imposing regulation based on the substantive nature of the intermediation. … It calls for regulation to be congruent, not necessarily identical,” they write.
The authors examine two case studies to illustrate the role played by non-bank financial institutions: the financing of non-prime mortgages (mortgages for borrowers with weak credit records) and the Treasury securities market at the start of the COVID pandemic. And they offer an example of how their congruence principle could work in the repo market. They would align bank-capital requirements with the rules for margining at clearinghouses and haircuts for bilateral repo transactions.
FSOC has 11 member-agencies, and the authors acknowledge that the “prospect of protracted inter-agency negotiations is hardly encouraging.” But, they conclude, “inter-agency processes in which the Treasury and Fed have the legal authority to take leadership is superior to the currently available alternatives.”
“You don’t have to have a kumbaya moment among all 11 FSOC members,” Metrick said in an interview with The Brookings Institution.
The authors write that the freezing of financial markets last March suggests there is “enough consensus to sustain momentum for a regulatory response.”
“I have more optimism now—not huge optimism—that something could get done than at any point in the past,” Metrick said.
Citation
Metrick, Andrew and Daniel K. Tarullo. 2021. “Congruent Financial Regulation.” BPEA Conference Draft, Spring.
Conflict of Interest Disclosure
The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. Discussant Hyun Song Shin is an Economic Adviser and Head of Research at the Bank for International Settlements, which had the right to review his work.
A few small banks have become overdraft giants
The explosion of overdraft fees makes basic banking expensive for people living paycheck to paycheck. Banks and credit unions generate over $34 billion in overdraft fees annually by one estimate. What those with money experience as ‘free checking’ is quite expensive for those without. Prior research has focused on who pays overdraft, finding a small number of people (9%) are heavy overdrafters accounting for 80 percent of the fees. Not as carefully researched is whether this is just a small part of banks’ general business model, or whether for some banks overdraft has become their main source of profit. In fact a few small banks have become overdraft giants relying on overdraft fees as their main source of profit. These banks are really check cashers with a charter. Why do bank regulators tolerate this?
For six banks, overdraft revenues accounted for more than half their net income. Three had overdraft revenues greater than total net income (meaning they lost money on every other aspect of their business). First National Bank of Texas (doing business as First Convenience Bank) made over $100 million in overdraft fees yet posted an annual profit of just $36 million in 2020. Academy Bank and Woodforest National banks likewise made more money on overdraft revenues than profits in 2020. All three were entirely reliant on overdraft fees for any profit in 2019 as well. This is not a one-year blip; it is their business model. Armed Forces Bank, Arvest Bank, and Gate City Bank all rely on overdraft fees for more than half their profit.
Five of these six banks are national banks, regulated by the Office of the Comptroller of the Currency (OCC). Arvest Bank is a state-chartered institution whose primary federal regulator is the Federal Reserve (Saint Louis District), which seems to tolerate Arvest’s increasing reliance on overdraft as they went from 54 to 62 percent of total profit between 2019 and 2020. These regulators that allow banks to have a business model that depends on a single fee, charged only to consumers who run out of money, are not protecting the ‘safe, sound, and fair operation’ of the banking system.
It is disturbing that regulators tolerate banks that are mostly or entirely dependent on overdraft fees for profitability. Most of these are banks are regulated by the Office of the Comptroller of the Currency (OCC), but others are primarily federally regulated by the Federal Reserve and the FDIC has backup authority over all insured institutions. From a consumer protection stance, these entities operate more like check cashers and payday lenders than banks. From a safety and soundness proposition, reliance on this one highly costly fee is not sustainable. Don’t take my word for it: Oliver Wyman rang the alarm bell on overdrafts: “What should banks do about overdraft? We believe the crisis is accelerating the need to replace an antiquated product and an unsustainable value exchange.”
These are small banks, and most would be considered very small. Five had between $1 billion and $3 billion in assets (about one-hundredth the size of JPMorgan Chase). However, these banks may not even be the worst overdraft abusers. The smallest banks (those with assets totaling less than $1 billion) and most credit unions are not required to report their overdraft fee revenue at all. Researchers and consumer advocates have no idea how reliant they are on overdrafts. Unless bank regulators are asking these questions, the regulators may not know themselves. Regulators need to collect and publicize overdraft data for all banks and credit unions regardless of size.
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In principle, overdraft fees are intended to deter depositors from overdrawing their accounts. There is a customer benefit to not having your purchase declined at the cash register. However, overdrafts are incredibly expensive: $35 to cover a $25 purchase that is repaid in two days is equivalent to an annual percentage interest rate (APR) greater than 25 thousand percent. Granted, APR is not always a useful tool to compare products, but it is one most consumers are familiar with, and no actual loan on those terms would ever be permitted. This is why the decision to label overdraft as a fee instead of a loan—even though it is the extension of short-term, small dollar credit—has significant regulatory consequences. And it’s why it could be reversed by future regulators.
In practice, overdrafts are the business model for these six banks and maybe more. These entities are not really banks in the traditional sense of taking deposits, making loans, and helping customers and the economy. They are a combination of payday lenders and check cashers, whose business model depends on a single product with a sky-high annual interest rate that is only paid by people who run out of money.
Bank and credit union regulators need to crack down on these institutions that are operating in a neither safe nor sound manner. They should start by putting any institution for which overdraft is more than 50 percent of their total profit under strict consent decree. If the institution cannot change their business model then their ability to maintain their charter comes into serious question.
Regulators ought to reconsider whether the overdraft product is really a loan, not a fee. The Consumer Financial Protection Bureau should also engage. Lending money and then recouping it later, plus something extra, is economically a loan. Calling it a fee may exempt it from certain regulations, but it does not change its nature.
Finally, all banks and credit unions should be required to offer a basic, low-cost, no overdraft fee product. Bank On and the FDIC have both drafted requirements for these types of accounts. The American Bankers Association has called on all banks to offer them. Regulators and Congress should require it. This is a far more effective way to address the problem of the unbanked than other ideas, such as postal banking, because the main reason the unbanked cite for not having an account is cost, not branch location or hours.
Life before and especially during the pandemic forces those on the economic edge to make difficult financial choices with substantial health consequences. Now more than ever banks need to be a source of support for people, not fee generators. Banks reliant on overdrafts for their profits are no more than check cashers with a charter. Regulators are supposed to protect that charter; now, they need to act.
Government-sponsored enterprises at the crossroads
Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) play a foundational role in the U.S. housing market, providing financing to lenders for nearly half of current U.S. mortgages by buying the mortgages from lenders and packaging and selling them to investors. This makes mortgages cheaper and more available across the country.
During the housing boom of the 2000s and the crash in 2008, the GSEs were woefully undercapitalized. They were rescued by the federal government and placed into conservatorship with strict oversight by their regulator the Federal Housing Finance Agency (FHFA). Subsequently, multiple proposals emerged to restructure or replace the GSEs to reduce their risk of failure and advance the public mission that is the basis for their public support. While administrative reform of the GSEs has been ongoing since conservatorship began, in the past year FHFA has hastened the process of releasing them from conservatorship.
Any changes to the GSEs’ structure or operation will determine how well they are able to serve their public mission. These changes are taking place in the context of the current COVID crisis, a long lasting and broad affordable housing crisis, and a national reckoning on historic and ongoing racial discrimination. As discussed in this paper, several essential steps are necessary for the GSEs to best serve their important role.
Conservatorship has created an historic opportunity for addressing the nation’s affordable housing crisis and advancing racial equity in housing. As part of the assistance plan for the GSEs, the government received stock interests in the GSEs, now valued at $48 to $98 billion by the Congressional Budget Office. The value of these assets comes from fees collected from GSE loans and that value should remain in the housing market to further affordable housing. In particular, the government’s stock interests in the GSEs should be exchanged for a comparable commitment by the GSEs of additional affordable housing measures and a restorative justice housing program that provides targeted down payment and other assistance aimed at closing the racial homeownership gap.
While most home values and equity rebounded from the 2008 recession and withstood the COVID crisis, many families have struggled, particularly lower wealth families and families of color. A widespread affordable housing crisis limited opportunities for many across the country going into the COVID crisis, with homeownership far below pre-housing boom levels and more than 20 million families struggling with unaffordable rent. Conditions worsened in 2020.
A primary statutory purpose of the GSEs is to advance affordable housing. While the GSEs have maintained their affordable housing programs in recent years, conservatorship has constrained these activities. The GSEs have operated with limited capital at a time when the country needed substantially increased focus on and support of affordable housing from the GSEs. Now they must greatly increase their work to meet the country’s pressing affordable housing needs.
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The past year has also seen a national reckoning on the history and continuation of racial discrimination, exclusion, and segregation in our country. Systemic racial barriers exist in all facets of American life, including policing, healthcare, and housing. The housing market profoundly manifests these barriers, including in the huge gap between white homeownership, at 72%, and Black and Latino homeownership, at 42% and 48% respectively. This disparity is as great as that existing before the passage of the Fair Housing Act in 1968 and even going back to the 1890s. For the GSEs, only a small percentage of their home purchase loans have gone to Black and Latino homebuyers in recent years, with less than 5% of their loans made to Black families in 2019. The GSEs’ charters include a duty to advance fair lending and equity, and much more has to be done by them to advance that national responsibility.
The success of the GSEs in conservatorship – in which they have operated as de facto utilities and stabilized the housing market following the 2008 housing crash – establishes that utility oversight is the best structure for the GSEs going forward. During the COVID public health and economic crisis, a utility structure has enabled the GSEs to provide critical relief to the housing market and the overall economy – assistance that was possible only due to the GSEs’ special status, their substantial resources, and the enhanced oversight authority granted to FHFA under conservatorship. A utility structure should be implemented permanently in order to secure the GSEs as an emergency backstop during a crisis, enhance operation of the GSEs in regular times, and advance the GSEs’ public mission.
Increased affordable housing support, racial equity programs, and utility oversight should be solidified and formalized during conservatorship while the GSEs build up capital. It is critical for these reforms to be implemented before release of the GSEs occurs. While GSE reform can be implemented legislatively or by administrative action, enacting GSE legislation has proven difficult. Thus, continuing administrative reform is more likely. Central to the reform process is resolution of the GSEs’ obligations for the aid it received following the 2008 crisis and the ongoing backup support the government will continue to provide in the future. Any amendments to the documents governing these issues will lock in the terms of the GSEs’ operation and obligations going forward and will be difficult to change. Thus, bolstered affordable housing and racial equity measures and utility oversight must be baked into these steps.
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Michael Calhoun is president of the Center for Responsible Lending. Lewis Ranieri is chairman and CEO of Ranieri Solutions LLC; co-chairman for the National Association of Home Builders Mortgage Roundtable since 1989; and board member of SolomonEdwards Group, Inc. since 2018. Other than the aforementioned, the authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. Other than the aforementioned, they are currently not an officer, director, or board member of any organization with an interest in this article.
Economic Impact Payments: Uses, payment methods, and costs to recipients
Executive Summary
When the COVID-19 crisis struck the United States in the spring of 2020, it posed a threat not only to the physical health of Americans but also to their financial health. The crisis found most Americans in financially vulnerable or coping positions, and many with incomes that barely made ends meet, high levels of debt, and low levels of savings that would not sustain them through the crisis. Recognizing that the social safety net in the U.S. would not be sufficient to support individuals and families through this crisis, several provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act were intended to provide economic relief. Among these relief provisions were “Economic Impact Payments” (EIPs), direct payments to individuals and families broadly available to all of those making under specified income thresholds. As policymakers implemented these payments they ran into a number of challenges, such as identifying eligible recipients and distributing payments efficiently. In this report, the Financial Health Network draws upon publicly-available data and our own U.S. Financial Health Pulse to estimate how long recipients waited to receive their EIP, what fees some might have paid to access their EIP, and how recipients used their EIP. The report also compares EIPs under the CARES Act to the more recent round of $600 direct payments created by the Consolidated Appropriations Act enacted at the end of 2020. Our findings include the following:
One in 20 eligible recipients still had not received their CARES Act EIP after six months.
Only 45 percent of CARES Act EIPs were distributed in the first wave. Under the Consolidated Appropriations Act, 77 percent were distributed in the first wave.
It took almost four months to distribute 90 percent of CARES Act EIPs. Under the Consolidated Appropriations Act, it took less than three weeks.
One in 10 Americans received a paper check under the CARES Act, despite having a bank account.
Over three million paper checks from the CARES Act were cashed through check cashers.
A family of five could have paid $195 or more in check cashing fees in some states.
CARES Act EIP recipients paid an estimated $66 million in check cashing fees.
The most common uses of CARES Act EIPs were spending, housing, and bills.
The report concludes with recommendations for policymakers to ensure that future direct stimulus programs run more smoothly, as well as a brief discussion of financial infrastructure shortcomings and strengthening the social safety net.
Click here to download the full report.