02/15/2012 02:37 pm ET Updated Apr 16, 2012

Financial Regulators Don't Reflect America's Diversity

One intriguing question from the subprime mortgage meltdown and ensuing financial crisis is: Could the crisis have been averted if our financial regulators were more plugged into the communities that were hit first and hardest?

There's a good case to be made that it could have been. But, as a new Greenlining Institute report, "Government That Looks Like America? Racial and Ethnic Diversity in Financial Regulatory Institutions," shows, our financial regulators are very far from looking like America.

The Dodd-Frank financial regulatory reform bill included a provision creating Offices of Women and Minority Inclusion in all 20 federal agencies that regulate our financial system. Each OMWI is responsible for taking steps to diversify its agency's workforce, increase contracting opportunities for women- and minority-owned businesses, and assessing the diversity practices of the firms their agency regulates.

To get a baseline assessment of the agencies' diversity as the OMWIs begin their work, we asked all 20 OMWI directors for diversity data for their agencies' senior management and staff. Of the 19 agencies that responded (all but the Securities and Exchange Commission), 15 provided enough detailed data to allow a thorough analysis and comparison: All 12 Federal Reserve Banks, the Fed Board of Governors, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

The results aren't pretty. People of color made up just over one third of America's workforce in 2010, but they aren't represented at anywhere near that level at the decision-making levels of financial regulatory agencies.

At the executive management level, only the Federal Reserve Bank of Minneapolis included people of color at close to their level in the national workforce: 28.6 percent. The next best, the Fed Board of Governors, was under 20 percent. Three federal reserve banks -- Boston, Cleveland, and St. Louis -- had not one person of color in executive management. Those numbers are staggering when you consider that non-Hispanic whites make up just 47 percent of Boston's population and only 33.4 percent of Cleveland's.

Four of the 15 agencies had zero African Americans in executive management, seven had zero Latinos and nine had zero Asian Americans. Native Americans and Native Hawaiians/Pacific Islanders were almost entirely missing.

The numbers get better as you go down the organizational flow chart. A handful of agencies, for example, had strong representation of people of color in middle management, and a slightly larger number had solid diversity among professional employees -- accountants, computer programmers, etc. The heaviest representation of people of color was among administrative support and service workers.

But at the levels where big decisions are made, these agencies are very, very white.

So why does this matter? For one thing, diversity brings practical advantages. In 2005, the Government Accountability office reported that "diversity management makes good business sense that enhances productivity and innovation."

More specifically, regulators drawn from a narrow stratum of society may simply miss problems that are outside of their experience, but which could have far-reaching consequences.

For example, we know that the foreclosure crisis did disproportionate damage in communities of color, often for reasons that made little economic sense. For example, data from the Federal Reserve Bank of San Francisco show that, among borrowers with FICO scores of 720 or higher, African Americans and Latinos were four times as likely as white borrowers to get high-cost, subprime mortgages. Clearly, something was happening in these communities that regulators didn't see until it was too late.

As DiversityInc CEO Luke Visconti put it in a recent column, "The [Fed] board members are good Americans, serving our country as best they can, but their lack of diversity management and stunning lack of results sharply limits their ability to perceive reality -- and it limits their ability to anticipate when the next model is broken."

Having financial regulators that look more like America -- meaning not just racial and ethnic diversity, but diversity of backgrounds and experiences as well -- isn't a cure-all by any means. But it would be a good first step toward creating a system that won't be blindsided by the next crisis.