Bank Failures in the Peach State

Five Cent Nickel posted a quick post this morning about Bank Failure Rates.   I found one of the statistics very interesting:

• Between 2005 and 2007, there were 3 failed banks
• Average: 1 failed bank every year. 

• Between 2008 and 2012, there were 465 failed banks
• Average: 1 failed bank every 4 days

Thankfully, bank failures have slowed down since the peak of the Great Recession.   An additional characteristic of this failure spree is that almost 30% of the failed banks were in just two states - Georgia and Florida.  

The inset picture to the left is courtesy of the Federal Reserve Bank of St. Louis.  They have this really cool interactive tool of all the bank failures since 2007. 

What is it about these two southern states that has caused so much financial distress?  Florida had a big real estate bubble, of course. 

But why does Georgia lead the nation in bank failures?  Unlike many states, Georgia has only one really major metropolitan area (Atlanta).  Economic problems in this one city will spell disaster for the whole state.  Florida has much more variation and balance between its different regions.  When the BP oil spill caused trouble on the Sunshine State's Gulf Coast beaches, for example, vacationers flocked to the Atlantic coast instead. 

Why do banks fail? According to Sal Bommarito, major reasons why banks fail include the following:

1. Bad Loans
2. Funding Issues
3. Asset/Liability MisMatch
4. Regulatory Issues
5. Proprietary Trading
6. Non-Bank Activities
7. Risk Management Decisions
8. Inappropriate Loans to Bank Insiders
9. Rogue Employees
10. Runs on Banks

In addition to being a one-trick metro pony, Georgia also encourages the proliferation of many small community banks versus large multi-branch behemoths.  State law previously protected small banks from competition, such as by prohibiting banks from opening branches across county lines.  With almost 160 counties in Georgia, this encourage the creation of a very large number of banks.  In 2008, there were 334 banks in Georgia.  Over 100 of these have failed in the last 5 years - only 228 banks remain in the Peach State. 

The small community banks held closer ties to the local residential housing market in and around Atlanta than national banks would.  With most of their eggs in one basket, Georgian banks had more to lose when the basket upended.  There were too many banks trying to serve too small of a banking community, and there weren't enough barriers to entry (such as backing requirements for loans) in order to prevent disaster when the small banks began to domino.