Some background on the banking crisis in Georgia

I have been getting a lot of questions about issues regarding the ongoing banking crisis — FDIC orders, bank closings, etc.

First off, I should say that the Federal Deposit Insurance Corporation is easy to find online and their site has plenty of information for account holders. In general, even if your bank is closed, you have nothing to worry about as long as your holdings are no more than “$250,000 per depositor, per insured bank, for each account ownership category.” There’s much more on this page about insured deposits.

On average over the last year, the FDIC has been closing about three banks per week, but I expect the pace to quicken in 2011 because of the large number of problem banks. Closings happen on Friday evenings, usually about 6 p.m., with the banks re-opening the following Monday morning under new ownership. In cases where other banks cannot be found to acquire the failed one, federal regulators might take over operations until it can be disbanded. These closures cost taxpayers millions of dollars each week, so it seems pretty obvious that there were regulatory failings over the last decade that allowed banks to take on too much risk.

Many new banks were created in Georgia in recent years, apparently due in part to relatively light regulation of the industry. Primarily because of excessive risk-taking and overexposure to real estate before the sector began collapsing, many Georgia banks have failed or are in serious trouble.

For this paragraph, I’m relying on data from this post on Calculated Risk. In 2007, Georgia had 352 banks. That’s more than California (313) or Florida (317). There are other states with a seemingly disproportionate number of banks, like Iowa with 391. But just one bank in Iowa has been closed by the FDIC since 2007. From 2008 to 2010, Georgia led the nation with 51 bank closures (that’s as of 12/10, another bank has closed since).

Georgia currently has 64 banks operating under some sort of FDIC order, in addition to the 52 that have already closed since the recession. That means about 1/3 of the state’s banks in 2007 have either failed or are in serious trouble. California, Florida, and Illinois also have about that many banks in trouble. Take a look at the unofficial problem bank list, which is maintained by surferdude808 and published in a great format by Calculated Risk. The list is “unofficial” because it can be updated only after the public release of enforcement actions — i.e., there might be banks operating under orders that have not been made public.

As of the end of January, there are 949 banks nationwide on the growing list. But there could be considerably more banks that the FDIC is watching in some way. On January 14th, for example, the FDIC closed Oglethorpe Bank in Brunswick, Ga. with no prior enforcement action having been made public.

As of January 28th, 2011, there are 64 Georgia banks on the unofficial problem bank list, including the following ones in southeast Georgia: Atlantic Coast Bank in Waycross, First Southern National Bank in Statesboro, Citizens Bank of Effingham in Springfield, First Chatham Bank in Savannah, Pineland State Bank in Metter, Citizens State Bank in Kingsland, and The Heritage Bank in Hinesville. (There are so many banks on the list and so many different towns that I’m not familiar with, I might have missed one or more.)

The following banks in southeast Georgia have already failed: Satilla Community Bank in St. Marys, First National Bank in Savannah, Darby Bank & Trust Co. in Vidalia, and Oglethorpe Bank in Brunswick. You can get more detailed info on the FDIC’s failed bank list. Woodlands Bank of Bluffton, S.C. has also failed. When a bank fails, that obviously means that all of the branches are affected (several have asked that question).

If the economy were to improve quickly and if real estate prices began to rebound significantly and if there were a surge of new private commercial investment, a fair percentage of the nation’s problem banks might be able to avoid failure. But given recent trends, I think a clear majority of the 900-plus problem banks will be shut down by the FDIC over the next two years.

Georgia’s state leadership has so far shown no interest in looking into how Georgia came to be regarded as the state with the most significant banking crisis. As I noted in another post, the new chairman of the state’s Senate Banking Committee, Jack Murphy, is named in a $70 million suit by the FDIC against various individuals involved with the failure of Integrity Bank. The close ties between politicians and bankers begs to be looked at more closely, and we need a thorough review of the state’s regulations so we can determine how policy or personnel failings contributed to the depth of the state’s crisis.

There’s not much to be done about it right now, but it would also be worth investigating the degree to which the presence of so many troubled banks is impeding the investment in new ventures that could help us shake off the recession. We may have gone from a period of excessive risk-taking to a period of insufficient risk-taking. That could be bad news for the state, especially in terms of small business creation, expansion, and employment.