Last Friday the FDIC seized First Midwest Bank in Waukegan, Illinois making it the 40th FDIC takeover in 2012. The state of Georgia alone has seen nine bank closures this year. This post will address the reason for the continued pace of failures and why some additional consolidation may be healthy for the banking system.
Roughly 500 U.S. banks have failed since 2007, the majority of which were relatively new banks — many less than five years old. These younger banks were often started to serve the housing boom which created enormous lending opportunities in the areas of development, construction, and mortgage. As the housing boom ended, most of the housing-oriented lenders started failing.
There are still over 7,000 individual banks in the U.S. — not branch locations but separately branded banks — many of which have a multi-state presence. Before the credit crisis, 340 separately-chartered banks were operating in Georgia and after 90 failures since 2007, that number is now around 250. That means that Georgia has accounted for nearly 20% of all bank failures in the U.S. since 2007.
However, the following should make you feel better (or at least less bad) if you are a Georgian — The largest* Georgia retail bank failure in the past 5 years was Georgian Bank with assets of $2 Billion, placing it 50th on the list of largest bank failures in the U.S. Additionally, the total of all Georgia bank failures since 2007 is less than any one of the largest eight U.S. banks that have failed over that period. It is still difficult to see another bank fail every few weeks in Georgia but it helps to understand that Georgia has fared much better than many states. [*This does not include the Bankers Bank, a/k/a Silverton, which was not a retail bank).]
So, why are there so many small banks in Georgia? First, through the 90’s and early 2000’s Georgia was a magnet for retirees and job seekers and these new entrants to the state drove significant demand for new housing. Second, Georgia had a Banking Commission that was willing to grant new bank charters relatively liberally. Finally, large banks were actively buying smaller banks in order to expand their market presence. The combination of all of these factors created an environment with very high incentives for new bank formation.
It has been argued by some that the banking consolidation in Georgia is healthy for the system as quality leaders and bankers are concentrated in the remaining banks. Some experts estimate that Georgia will lose another +/- 30 banks by the time everything settles out but that will still leave the state with over 200 GA-based banks plus all of the banks from outside of the state with a presence in Georgia.
The health of Georgia’s banks should not be judged solely by the number of closures which is only one indication of the strength of the system. Overall, Georgia’s banking system has fared better than those of many states and Georgia’s banks are well positioned to provide capital for the state’s economic recovery.