Abstract
While some big lenders are returning to profitability, the Federal Deposit Insurance Corp. (FDIC) and other government agencies are still very much in crisis mode. Some 106 banks have failed in the past year across the United States, and 416 others are on the government's watch list.
With its cash reserves depleted from all the recent seizures, the FDIC is desperately looking for healthy banks to buy troubled ones, or at least some of their assets. If it can't find buyers, it will be forced to shutter banks and write checks to depositors for up to $250,000 apiece. That could also lead to years of economic stagnation in the affected regions, with capital-starved businesses and consumers competing for scant loans.
Nowhere is the task before regulators more difficult than in Georgia, where Jim Edwards is CEO of a small, family-controlled bank in Griffin. Since December he has purchased two failing banks in neighboring counties at bargain prices with the FDIC's help. Those purchases reassured frightened depositors, kept most bank employees in their jobs, and made it possible for two institutions that had lumbered along for months as virtual zombies to resume lending to good customers.
Georgia has always been glutted with small banks, but most of the problems are limited to a 50-mile radius around Atlanta now known to regulators, bankers, and realtors as the Circle of Death. A primary cause of the problems in this area was brokered deposits, which allow large investors to have their deposits spread across many banks' CDs to stay within the $250,000 FDIC insurance limit. The trouble with brokered deposits is that they let banks grow more quickly than their managers can handle. They're also riskier than local deposits because the depositors are more likely to pull their money out at the first sign of trouble.
Brokered deposits fueled a building and banking boom in Georgia, particularly around Atlanta, and led to the creation of many new small banks. When the real estate market collapsed, loans went bad, and few new loans were made. That left little to support the brokered deposits, which made up more than 50% of the assets in some banks. While some of the failing banks have been purchased and saved by healthy banks, there aren't many healthy banks left in Georgia, and there are 49 banks that are still in imminent danger and are likely to fail if the economy doesn't rebound soon.
Discussion Questions
- Why is it critically important to the recovery that small failing banks be purchased and saved?
- What are brokered deposits, and how did they contribute to the problems with banks in Georgia and in the Circle of Death in particular?
- In a small bank like FirstCity, how can having too much in deposits be a problem? What led to FirstCity's collapse?
- Explain what a "loss share" deal is, such as the one used by the FDIC in the sale of First Coweta. Why would the FDIC be willing to offer such a deal?
- What does the related article "Georgia Banks Bracing for Major Hit" (Atlanta Journal-Constitution, October 17, 2009) add to the picture of how small Georgia banks are likely to fare over the next few months? Why are the problems noted in the article likely to get worse instead of better?
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