A commitment to an inclusive society also means a commitment to an inclusive economy. Such an economy would represent a rebuke of systemic racism and other exclusionary structures. It would represent a true embrace of the principles that all are created equal and should enjoy unburdened life, liberty, and the pursuit of happiness.
— Raphael Bostic, president and CEO of the Federal Reserve Bank of Atlanta, from the essay A Moral Imperative and Economic Imperative to End Racism
Despite the nation's progress toward a more inclusive economy over the last half century, vestiges of structural discrimination are still entrenched in US institutions, and often manifest themselves in the form of disparities in economic outcomes. To promote the topic of racial equality, the Atlanta Fed has partnered with other organizations, cohosting, hosting, or participating in several recent events, including the Atlanta Fed-Princeton University conference on Racial Justice and Finance in September 2020 and the Racism and the Economy webinar series, which began in 2020 and will conclude in early 2022.
On October 14–15, 2021, the Atlanta Fed kicked off the inaugural conference on Racial Inequality and Disparities in Financial Markets to further promote research on inequalities in the financial system. The conference, which was virtual, included presentations and discussions of six papers on racial or gender disparities in various financial markets, including credit markets for mortgages and automobiles, labor markets, and the academic finance profession.
Paula Tkac, associate director of the Atlanta Fed's Research Department, gave the opening remarks. She began by describing how researchers face a dearth of high-quality data in this area, but shared she is hopeful the increased interest in research on racial inequality will spur the effort needed to bring together better data sets. Tkac then called for "a deeper understanding of the 'whys', and insight into potential paths forward toward full economic inclusion" as research progresses. She stressed that this research is crucial in the context of the Fed's monetary policy mission, as a fuller understanding of the barriers stopping individuals from participating to their full potential in labor and financial markets is necessary for good policymaking. Tkac concluded her opening remarks with a quote from Atlanta Fed president Raphael Bostic from last year's Racial Justice and Finance conference:
The influence of race is multidimensional and persists over time. We must look "under the hood" at our institutions to see and truly understand their design and its implications...In your research, think about how you ask questions, particularly how you incorporate historical and institutional realities into your research designs. Examine the role played by institutions and structures and explore how the burdens they impart have contributed to inequities that are still with us...With such an understanding, we can then find more creative and accurate ways to incorporate race into our models, estimation approaches, and narratives. This, I hope, will yield better insights and result in a set of policy prescriptions that can truly create meaningful and lasting change.
Three papers in the conference examined racial disparities in mortgage lending. In "Racial Disparities in Mortgage Lending: New Evidence Based on Processing Time," authors Bin Wei (Atlanta Fed) and Feng Zhao (University of Texas–Dallas) looked at racial disparities in mortgage processing time, which is the time needed for a loan to be processed. Looking at the period prior to the 2008 global financial crisis, they found that Black borrowers experienced significantly longer processing times (about five days more) than did White borrowers for mortgages securitized by the government-sponsored enterprises. In contrast, processing times for the privately securitized mortgages were much shorter for Black borrowers, driven by the fact that Black borrowers were more likely to use nonstandard mortgage financing channels where fast-processing lenders and loan products proliferate.
In the second paper focusing on the mortgage market, "Mortgage Prepayment, Race and Monetary Policy," Kris Gerardi (Atlanta Fed), Paul Willen (Boston Fed), and David Zhang (Harvard) found that Black and Hispanic borrowers pay significantly higher mortgage interest rates than do White and Asian borrowers, and that the primary reason for the large gap in rates is due to differences in refinancing behavior. Minority borrowers are significantly less likely to have refinanced their loans in response to declines in mortgage interest rates, and as a result, they benefited less from lower interest rates.
In the third mortgage paper, "Mortgage Policies and Their Effects on Racial Segregation and Upward Mobility," Nirupama Kulkarni (Centre for Advanced Financial Research and Learning) and Ulrike Malmendier (University of California–Berkeley) noted that housing policies aimed at reducing racial disparities in home ownership can have unintended adverse consequences. Exploiting variation in the ease of mortgage financing created by the 1992 GSE Act, which explicitly targeted underserved neighborhoods, they showed that, while Black home ownership increased in targeted neighborhoods, white families moved out. As a result, segregation increased and the upward mobility of Black children deteriorated. They pointed to declining house prices, reduced education spending, and lower school quality in targeted areas as plausible channels for the decline in upward mobility.
The paper "Testing Models of Economic Discrimination Using the Discretionary Markup of Indirect Auto Loan" by Jonathan Lanning (Philadelphia Fed) examined racial discrimination in auto lending. Lanning presented some compelling empirical evidence for taste-based discrimination in the auto loan market. Auto loans are typically the largest consumer loans after mortgages. More than 80 percent of these loans are indirect, meaning they are arranged by a dealer on the borrower's behalf. The dealer has the discretion to mark up an indirect auto loan by as much as 250 basis points over the rate at which the lender is willing to extend credit. In exchange for the rate increase, the dealer receives additional compensation from the lender. Lanning found that the average markup for Black borrowers is about 14 basis points higher than for White borrowers. More importantly, the racial disparity in the markup is shown to be consistent with the taste-based discrimination theory developed by Becker (1957).
The final two papers in the conference examined the gender gap in the academic finance profession and in the labor market. In the paper "Diversity, Inclusion, and the Dissemination of Ideas: Evidence from the Academic Finance Profession," authors Renee Adams (University of Oxford) and Michelle Lowry (Drexel University) examined how diversity relates to variation in career outcomes within the academic finance profession. They conducted their research based on a survey they administered to current and recent past members of the American Finance Association (AFA) on the professional climate in the field of finance. The survey had 1,628 respondents, about 30 percent of them female. Survey results suggest that female finance faculty members in general have a lower satisfaction level than do their male counterparts. The authors found that gender discrimination is one of the most important causes for this discrepancy.
In the final paper, "Hidden Performance: Salary History Bans and Gender Pay Gap," Jesse Davis (University of North Carolina), Paige Ouimet (University of North Carolina) and Xinxin Wang (University of California–Los Angeles) looked at how salary history bans affected the wage gap between male and female workers. These bans prevent employers from requesting and using a job candidate's prior salary information. Many states have adopted these bans with the explicit intent of reducing the gender pay gap. The idea is that historical pay discrimination against women is propagated if employers are allowed to use past salary information to set pay for new female hires. Presumably, imposing bans should prevent the perpetuation of past discrimination. However, the bans have the additional, negative consequence of preventing potential employers from observing a signal of worker productivity. So the overall effect of salary history bans on the gender gap is unclear. Using a large-panel data set of disaggregated wages covering all public sector employees in 36 states, the authors do not find evidence that salary history bans significantly decrease the gender pay gap.
All in all, the conference proved to be a memorable event. Papers incorporated high-quality micro data and state-of-the-art empirical methods that uncovered evidence of racial and gender inequalities across a variety of financial markets. The paper presentations and thoughtful discussant presentations spurred a lot of dialogue and debate around the nature of the disparities and their implications for future policy. We hope to hold similar conferences in the future, perhaps on an annual or biennial frequency, to continue to promote and raise awareness of this topic.
Bin Wei, a financial economist and adviser,
Kristopher S. Gerardi, associate policy adviser and economist in the Research Department at the Atlanta Fed, and
Feng Zhao
, an associate professor of finance at the University of Texas at Dallas