Georgia banks say 2 rules hurting them financially

As Georgia’s banking crisis drags on, bankers and other industry leaders are pushing for two changes they say could help stem the tide of red ink.

Atop the wish-list: a relaxation of rules that bankers say force them to value foreclosed homes and vacant lots at fair market rates. Values have plunged in today’s deeply troubled real estate market, causing banks to take deep losses on paper even if they don’t plan to sell the property until prices recover.

Another change would allow banks that fall below certain capital levels to keep bringing in so-called brokered deposits, a vital funding source for many banks that involves a broker who raises money from investors across the country and then shops for good interest rates. Current law bars most troubled banks from tapping into the brokered deposit market.

The issues may sound arcane, but many experts say the two rules have exacerbated the current crisis, sweeping too many banks into a vicious downward spiral.

The accounting rule “is just killing everybody. It’s a mess,” said Mark Kanaly, a banking attorney at Alston & Bird in Atlanta.

Consider Buckhead Community Bank, one of the state’s largest community banks that’s been consistently profitable since it opened about a decade ago.

With real estate values plummeting last year, the bank wrote down the value of its assets by $8 million and posted a loss for the year, said Marvin Cosgray, Buckhead Community’s president. By December, mounting losses dropped the bank just below “well capitalized” status as defined by regulators, cutting the bank off from acquiring new brokered deposits.

“So you can see how it’s sort of a domino effect,” Cosgray said.

Georgia bankers are lobbying their legislators in Washington to push for reforms. The Georgia Bankers Association, an industry group, also called for changes in a recent report.

The limits on brokered deposits are enshrined in a federal law passed after the savings and loan crisis of the 1980s and would take an act of Congress to overturn. Regulators consider brokered deposits to be much more volatile than “core” deposits like traditional checking and savings accounts. Officials are loathe to allow their use by troubled banks, though in rare cases waivers are granted to institutions that are deemed on track to restored fiscal health.

The “fair market” accounting rules are a deeply ingrained industry standard that also may be difficult to change. Banks are expected to carry loans at face value unless they are deemed “impaired.” Regulators say there is some flexibility built into the process, with appraisals only one tool banks may use to value distressed properties.

Georgia bankers’ frustration with fair market value accounting is separate from other efforts to end so-called mark-to-market accounting, which has forced some of the nation’s largest banks to value securitized assets — such as the toxic mortgage-backed securities that helped spark the financial crisis — at market values.

To show how fast losses can mount, Cosgray pointed to two troubled projects funded by his bank — a Sandy Springs home and a 20-lot subdivision in Paulding County.

At the subdivision, lots were prepared for new homes and a swim and tennis center was built. But the developer couldn’t finish the project and the bank took over the property. Cosgray said the value of the project has dropped by about $4 million from the original appraisal.

The Sandy Springs home, meanwhile, was appraised for $2.2 million in July 2007, but it went into foreclosure a year later and was valued for only $1.25 million.

“Now how can a property drop that much in a year’s time?” Cosgray asked.