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Bank failures in the Southeast: They ain't what they used to be

piggy bank under water

Who can forget the scene from It's A Wonderful Life when George Bailey, finally poised to embark on his long-awaited escape from Bedford Falls, finds himself more deeply rooted because of the panic-instilled run on his family's building and loan company? George pleads with his customers: "The money's not here. Well, your money's in Joe's house—that's right next to yours—and in the Kennedy house and Mrs. Maitland's house and a hundred others." This scene depicts the Depression-era banking crisis, a decade in which 9,000 banks failed, about 4,000 in 1933 alone.

Pan to 2009, when almost 140 bank failures occurred nationally—25 in Georgia and 14 in Florida. In 2008–09 Georgia led the nation in bank failures, and Florida was fourth, behind Illinois and California. Why did these two Southeastern states suffer such a disproportionate number of bank failures?

The recent round of bank failures stems from both sides of the balance sheet more than from a wave of panicked small depositors. Over the past few decades the Southeast's population has burgeoned as people have followed jobs to the Sunbelt. With historically low interest rates, increasingly easy access to credit, and steady growth in the demand for housing, Atlanta and south Florida markets responded with a surge in residential and commercial building. Significant speculative development ensued.

In Florida and Georgia the stage was set for the simultaneous creation of new community banks and the expansion of existing ones. Georgia laws make it relatively easy to charter a new bank (almost 60 percent of the Georgia banks that failed in 2009 had been established since 2000), and previous industry consolidation left many former bankers available to staff the start-ups. In the metro Atlanta area the real estate construction market is especially fragmented among numerous small developers who obtain their capital from community banks. Thus the assets of many of these banks were concentrated in real estate loans—particularly commercial loans, residential mortgages, and construction and development loans. (This pattern is typical of banks in the Southeast, where 71 percent of loans, as of the fourth quarter of 2008, were collateralized by real estate compared to only 55 percent nationally.) When loan delinquencies rose and real estate values plummeted, some banks were unable to stay solvent.

On the other side of the bank ledger, many of these same institutions had become overextended with brokered deposits, according to testimony before a congressional subcommittee in November 2009 by Jon Greenlee, associate director of the division of banking supervision and regulation at the Federal Reserve Board. Out-of-state brokers who buy CDs and other large time deposits from banks on behalf of professional investors were shopping for the highest possible returns on their investments. Many of these troubled banks had significant quantities of these liabilities on their books. Investors withdrew this money at the first signs of weakness in banks' assets.

The current crisis has seen relatively few examples of 1930s-style bank runs. Collapsing real estate values and brokered deposit withdrawals have done most of the damage in Georgia and Florida bank failures.

In response, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and other government agencies have moved aggressively to restore the financial system. Depositors have not suffered losses, credit markets are functioning again, and interest rates have fallen.

Recent economic indicators suggest that these moves are beginning to have their intended effects. Savings rates have increased, and home sales and consumer confidence have shown some intermittent signs of improvement. Once the residential sector begins to recover and job growth returns, many troubled banks will start to stabilize. (Some Southeastern banks, however, face additional concerns as conditions worsen in the commercial real estate market.)

Just as George Bailey's worried depositors were soothed by his pleas, today's customers should find solace in their deposit insurance as well as from the signs that the financial system is stabilizing.

By Amy Hennessy, economic and financial education specialist, and Gary Tapp, economic education director, Atlanta. They thank Scott Hughes, an Atlanta Fed supervision and regulation subject matter expert, and Whitney Mancuso, a senior economic research analyst, for helpful insights and data.

February 24, 2010