With a rash of Georgia bank failures this past week, many are scratching their heads wondering why Georgia leads the nation in bank failures. A superficial look into the numbers would indicate a more severe problem than actually exists. While the state has been hard hit by the recession—Georgia’s jobless rate is about a half point ahead of the national average—the local economy is in far better financial condition than many others.
In order to understand the disparity, giving Georgia 1/3 of all bank failures since the beginning of the recession, one only has to look at the total number of banks, especially small banks, that are chartered within its borders. For many years, the state’s politicians held a love affair with the small town, local bank, and had crafted laws forbidding banks from operating branch offices across county lines. The laws encouraged the growth of dozens of one or two office institutions where locals could go and be easily recognized by the employees.
Georgia’s love for the small town bank didn’t begin to change until new laws allowed banks to expand their operations, a change that occurred less than 20 years ago. With its total of 159 counties, the state had created an artificial demand for a large number of separately chartered banks, and had encouraged an explosion of small to mid-sized institutions. With more than 300 state and federally chartered banks, Georgia, has more than either New York or California, states with dramatically larger populations.
The demise of the Georgia banking system began with the fall of the housing market. Most of Georgia’s community banks were heavily committed to development and construction loans. When homebuilders stopped purchasing lots, those development loans went sour; and when builders could no longer pay the interest on their construction loans, banks began toppling like so many dominoes. Unfortunately, there are still many Georgia banks struggling under the weight of “toxic assets;” and the state will likely maintain its leadership position in this dubious category.
So, is there something sinister going on in Georgia’s banks; or is there something in the water? No, it’s just those darned unintended consequences, those pesky ones that most politicians are unable to foresee.
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