Georgia’s Bank Failures To Get Two Autopsies

Today’s Courier Herald Column:

Banking has been an important part of Georgia’s development as a regional leader in job growth and economic development. Atlanta long held the reputation as the financial capitol of the south, with financial service remaining a dominant part of the local economy even after most of the flagship banks moved their flags to North Carolina.

Banking was generally a safe and stable industry, fueling the growth and jobs for all those flocking to take advantage of all we had to offer. From 2000 to 2007, only two banks failed in Georgia. Then, in late August 2008, Integrity Bank of Alpharetta failed. It was the first of many. Since 2008, 74 Georgia financial institutions have been seized by the FDIC. 23 of those failures occurred in 2011 alone. Georgia will once again hold the dubious distinction of having the most bank failures in the U.S. for the year.

Tuesday, the United States House of Representatives passed a bill sponsored in the House by Lynn Westmoreland and in the Senate by Saxby Chambliss that will study the causes of bank failures in the hardest hit states. The study is more akin to an autopsy than to a surgical evaluation, as the information learned will be too late to save those under evaluation and analysis. The hope is to better understand the federal policies to see which may have helped, but perhaps more importantly, which exacerbated an already precarious situation banks in Georgia and other states hard hit by the real estate bust faced.

Chambliss said in a statement that “It is clear that Congress needs more information about the underlying causes of these bank failures. If there is a better way to resolve this crisis, we must pursue it. This bill is the first step to doing that,”

Westmoreland, a former home builder, emphasized the role community banks play in local economies. “Without these local lenders, job growth and economic investment can dry up – an unmistakable reality proven by the fact that the ten states with the highest number of failures also have some of the highest unemployment and foreclosure rates in the country. Hopefully, this legislation can lead to answers to not only what’s behind these bank failures but also answers to how we can make sure this doesn’t happen again in the future.”

The bill was introduced by Westmoreland in the House and passed in July. It was introduced in the Senate by Chambliss and passed with an amendment. The House accepted the amendment Tuesday and the bill now has been sent to the President for his signature.

The bill authorizes two separate studies. One will be conducted by the Inspector General of the FDIC, and the other will be an independent investigation by the General Accounting Office. The post real estate policies of the FDIC will be studied, with an emphasis placed on loss sharing agreements which institutions who acquire assets from failed institutions are insulated from downside risk when working out the loan portfolios of failed banks.

These agreements are critical as they not only affect the failed bank’s customers and the acquiring entity, but any other bank which is participating in a loan syndication. Because smaller banks have strict loan size limits, they often sell parts of their larger loans to spread risk among several institutions. When one of those banks fails, the workout strategy for that of an institution protected by a loss share agreement can become adversarial to the other banks who are still trying to manage 100% of their risk.

Many believe that banks protected by loss share agreements are accelerating collections on loans which have been syndicated, and thus causing excess pressure and possibly failure of otherwise healthy institutions.

If Georgia is to return to its customary position as a leader in job growth, it will need a healthy banking sector to do so. Westmorland and Chambliss’ bill is likely too late to save any additional banks which may be on the brink, but will hopefully be part of making sure that as Georgia recovers, a stronger and more resilient banking industry will result.


  1. saltycracker says:

    No reason why the IG of the FDIC & GAO can’t come up with some good insight & suggested directions – but you went too far making us feel warm & fuzzy that the legislators might follow the suggestions. After all they have taken some of the top ones in GA to task.

  2. jiminga says:

    My community bank is operating under a consent order that requires a change in the board of directors (done) and an increase in capital. The bank responded to the capital requirement by offering interest on checking accounts, causing a major influx of deposits by those switching from TBTF banks (me included). Guess what? FDIC rules prevent a bank operating under a consent order to pay interest on checking, thereby negating the banks efforts to comply with the consent order. Now that’s our government at work, right?

    BTW, they did find a way around the FDIC rule by paying for use of their debit card and accepting direct deposits. A nice bonus for me because I wouldn’t support a TBTF bank unless I eventually had no choice.

    In the meantime the FED gives the TBTF banks free money and condemns the locals to fighting for their survival, and nobody seems to care.

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