The Fall of Georgia Banking

The Fall of Georgia Banking

Anyone in the Metro-Atlanta area who hasn’t been out of the country for a year has seen numerous negative and extremely ominous headlines related to our local financial institutions.  As a recent article in the Wall Street Journal points out, Georgia is one of the hot beds of bank failures in the country (“Failed Banks Dot Georgia Landscape”).  Folks, the sad truth is that this trend will not only continue, but it’s about to accelerate.  Over the next few days, I’ll be explaining a great deal not only about how banks operate, but more specifically about how the Georgia banking industry got so bad so quickly.

Before I go any further, let me reiterate a point I try to constantly hammer home:  If your funds are within FDIC insurance limits, they are 100% safe and you will have almost immediate, if not immediate access to them if your bank fails.  Click the FDIC link to the right to learn more about coverage.

After reading the article mentioned above, you’re probably wondering how Georgia banks got into this position.  We haven’t heard a lot about big “sub-prime implosions” in the Atlanta area; the media has primarily focused on areas in California, Arizona, and Florida for those types stories.  So why, then, are banks in Georgia performing so remarkably poorly?

There were a number of reasons for this and they’re all interconnected like a giant spider web spun from 2001-2006.  I’ll explore each of the reasons in depth over the next few days, but here are the top causes, in my opinion, for why banks have and will continue to fail (in no particular order):

1.        Astronomical growth in number of new banks

2.       “Flipping” Banks (ominously  similar to flipping houses)

3.       Explosive population growth and projections of continued growth

4.       Relatively cheap deposits feeding supposedly “risk free” loans

5.       “Brokered” Deposits

6.       Large profit margins that still weren’t large enough to cover all the downside risk

7.       Unsustainable growth in debt

8.       Excessive concentrations in real estate

9.       Unbelievably high loan-to-collateral value

10.   Loan Policy Exceptions were “normal”

11.   Outright Fraud

12.   Poor underwriting of loans and oversight lending in general coupled with too little regulatory controls

13.   Sub-Prime Mortgages

14.   Too many bank presidents

In future posts, I’ll go into a lot of detail about each of these and really break it down on “Banking for Dummies” level.  Stay tuned.