Aug 27th 2009 NEW YORK From The Economist print edition
Georgia’s troubled banks
SUMMER in America’s deep South is usually a mixture of backyard barbecues, baseball games and sweet tea. This year, however, there has been no respite for regulators trying to contain the banking crisis. On August 21st BBVA, a Spanish lender, agreed to rescue, with government support, Guaranty Bank, a failing Texan firm with $12 billion of deposits. Across the Gulf of Mexico, in sweltering Georgia, things look worse. The state accounts for a fifth of the 100 or so bank failures in America since the start of 2008.
There may be more to come. Each week the Federal Deposit Insurance Corporation (FDIC) announces more failures in America. It has a secret list of more than 300 “problem banks” that are at risk of going broke, most of them small-town lenders. To identify bad banks, analysts are again using the “Texas ratio”, which compares non-performing loans to core capital and was popularised in the savings-and-loan crisis two decades ago. An alternative is to track where the FDIC sets up temporary offices. One is in Irvine, California, close to IndyMac Bank, which failed last year. There is a 500-man operation in Jacksonville, Florida, that has been placed deliberately close to Georgia.
What explains the FDIC’s modern-day siege of Atlanta? There were “too many banks to begin with,” says Dan Blanton, the head of Georgia Bank and Trust, a local community bank. Until the late 1990s most banks were run with county charters which restricted them from branching outside their own small patches of turf. Even today each of Georgia’s 159 counties has multiple banks to provide locals with southern hospitality, mortgages and current accounts. According to Joe Brannen of the Georgia Bankers Association, Georgians have “more affection for community banking” than people elsewhere.
Many of these community banks became overextended during the state’s economic boom. Over the past decade Georgia’s population has grown by 1.5m; thousands are still thought to be moving in each month. Property development surged in tandem. Georgia’s small banks were unable to meet the increasing demand for construction loans with slow-growing local deposits, so they began to offer high-yield certificates of deposit to out-of-state customers. As a proportion of funding, Georgia’s banks were twice as reliant on these as the average American bank. When the financial crisis struck, this “hot money” quickly left the state.
Although small, community banks were not isolated from systemic problems. They banded together in “participations”, a kind of multi-bank loan particularly common in Georgia, thanks to Silverton Bank, a prominent broker of syndicated deals. Known as the “banker’s bank”, Silverton was founded by a consortium that included about 200 Georgia lenders. When it was forced to liquidate in May, with more than 500 such group loans on its books, it caused a systemic problem for other banks in the state. Some of the defaulted loans were obscure and fiddly. One involved more than 60 Georgian banks funding land acquisitions on the outskirts of Phoenix, Arizona.
Yet whatever the structure of Georgia’s industry, the root cause is that bankers just got too optimistic. Banks fail, Mr Blanton says, when they “let the bucket fill up too much.” With few healthy banks left locally the most likely buyers of struggling lenders are outsiders, including foreign banks keen to expand their presence or private-equity firms. That latter prospect improved on August 26th when the FDIC agreed to lower restrictions that had been proposed for non-bank investors. Even then, however, for Georgia’s banks things are pretty far from being peachy.