Racial inequality could hurt U.S. credit rating, Moody's warns

Failing to close the yawning wealth gap between Black and White Americans could end up tarnishing the nation's credit rating, according to Moody's Investors Service.

The so-called racial wealth gap in the U.S. has continued to widen in good times and bad. White households' net worth grew 43%, to $61,200, between 1995 and 2016, while it remained flat at $35,400 for Black families, the credit rating agency said in a report on Tuesday, citing Federal Reserve data. As of 2016, only 8% of Blacks inherited an average of $83,000 in wealth from their parents, compared with more than a quarter of whites who inherited an average of $236,000.

Moody's, Standard & Poor's and other major ratings agencies continue to assign a top rating to U.S. government debt, which means lower borrowing costs. But the racial economic divide could change that. 

"The unequal position of the Black community in the U.S. is a salient and persistent feature of the inequality dynamic that exemplifies and exacerbates credit-relevant social risks," William Foster, a senior credit officer at Moody's, told investors.  

Homeownership gaps

That divergence compounds a deepening inequality visible across the U.S economy. But Moody's says that divergence has "disproportionately impacted" Blacks, making them more vulnerable to broad trends such as globalization and automation. Discriminatory practices such as "redlining" also continue to weigh on Black households, limiting their access to mortgages, credit cards and other types of loans. 

In 2019, for example, 44% of Black households owned their homes, compared with 74% of white households, according to Moody's. 

A recent LendingTree study found that Black mortgage applicants were denied 12.6% of the time, more than twice the national average of 6.4% across all other ethnicities. Lenders often reject Black borrowers even when they have adequate income and solid credit, said LendingTree economist Tendayi Kapfidze, who authored the study. 

Low homeownership and "the accumulation of hundreds of years of discrimination has resulted in a large wealth gap," Kapfidze said. 

Other drivers of inequality, including discrimination in criminal justice practices and in the workplace, further impede Black Americans from catching up.

Festering racial inequities could continue to fuel the kind of civil unrest that followed the death of George Floyd at the hands of Minneapolis police, according to Moody's. 

"Even if the immediate credit implications of the protests were limited, rising social risk, if left unaddressed by policymakers, can carry negative longer-term implications," Foster said.

By contrast, closing the racial wealth gap could boost the nation's gross domestic product — the total value of goods and services — by up to 6% by 2028, Moody's said, citing a report from consulting firm McKinsey. That's the equivalent of $4,300 for every American. 

"While there are indeed many social and economic issues that have contributed to the U.S.' increased political polarization in recent years, looking ahead, the combination of income and racial inequality is set to be a potent force for further potential polarization and inertia," Moody's said.