How Georgia Became The Failed Bank Capital Of The U.S.

California, Florida and Arizona are widely known to have had the most dramatic property declines since housing starting crashing in 2005.  Logically, one would assume that the majority of banking failures occurred in these three States, but that is not the case as can be seen below.

2008-2009 Banking Failures

State                     Number of Failed Banks               Assets

California                        9                                     $53 billion*

Florida                             5                                     $15 billion

Arizona                            0                                          0

Georgia                           11                                     $9 billion

* Indy Mac Bank accounted for $31 billion.

The Georgia banking failures by total assets indicates that many of the banking failures were of smaller size banks.  The reason so many banks failed in Georgia was due to the fact that there were simply too many banking institutions in Georgia, causing many of them to compete too aggressively for risky loans.

As detailed in the Wall Street Journal, Georgia had 112 banking startups since 2000, the third highest after California at 126 and Florida at 119.  Competition is a part of a healthy capitalist system, but in this case it was too much of a good thing as banks let loan quality suffer as they sought to increase their lending volume.

WSJ – Rob Braswell, commissioner of the Georgia Department of Banking and Finance, the top regulator of banks that have Georgia charters rather than federal ones, said that if most people with banking experience applied for permission to open a new bank, “it was hard to say no when they had such an abundance of capital.”

During a recent meeting with Georgia bankers, Federal Deposit Insurance Corp. Chairman Sheila Bair asked Christopher Maddox, head of Peoples Bank in Winder, Ga., why Georgia had so many banks. “Ma’am, may I respectfully submit that the FDIC approved every one of the applications,” he recalls replying.

Georgia’s predicament also is the result of a rapid expansion of the banking industry. Many of the new banks were small, and as they jostled for slivers of the market, they often made risky loans in speculative markets such as commercial real estate.

Given the high level of delinquent loans haunting the remaining Georgia-based banks, more failures are expected. About 30 banks in the state are at risk of failing, according to bankers and lawmakers.

The struggles of Georgia banks have inflamed fights between regulators, politicians and local bankers about who is most to blame and what to do next. Some bankers in the state complain that regulators are making their problems worse, forcing banks to take big write-downs on loan values, a common response when bad assets start piling up.

Regulators respond that they are just trying to apply one of the big lessons from the savings-and-loan crisis of the late 1980s and early 1990s: If the government hesitates to deliver tough medicine to overextended lenders, things could get worse.

Still, the FDIC and other regulators are being more assertive, sending real-estate specialists into Georgia, California and Florida to scrutinize troubled loans. In Georgia, the FDIC has installed two new officials in its Atlanta office. To handle a wave of expected failures in the Eastern U.S., the FDIC recently opened a temporary office in Jacksonville, Fla., with 500 employees.

As previously discussed, the FDIC is in the midst of hiring thousands of additional employees to deal with the surge in expected banking failures.

The FDIC has already vastly expanded its line of credit at the US Treasury to handle problem banks that must be closed.  Once the FDIC is fully staffed, expect the number of bank closures to expand dramatically, as recently predicted by FDIC Chairman Sheila Bair.

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