Georgia exercises status quo on banks

By Russell Grantham

The Atlanta Journal-Constitution

With Georgia leading the nation in total bank failures last year, you might think the state’s lawmakers would have arrived in town for the new legislative session carrying satchels full of proposed reforms to the state’s banking laws.

That’s not the case.

Aside from a few tweaks to lending rules, Georgia lawmakers aren’t likely to consider significant revisions to the state’s financial laws or regulatory system any time soon. This despite concerns that Georgia’s bank regulators have been inadequately funded, and that they may have allowed the creation of too many banks and too much lending to boom-and-bust real estate developers.

The state has about 300 banks, more than most larger states. About 90 percent are small, state-chartered banks overseen by both the Federal Deposit Insurance Corp. and the Georgia Department of Banking and Finance.

Twenty-five Georgia banks failed last year, almost a fifth of the nationwide total. Dozens more are expected to fail this year, dragged down by heavy losses on loans to defunct real estate developments.

Lawmakers, industry players and consumer advocates cite a variety of reasons for the state’s muted response to the Georgia banking industry’s ongoing troubles. Nationwide regulatory changes already in the works in Washington, D.C., could supersede any state laws that might be enacted, some say. It’s too early to talk about changing bank laws when dozens of banks are struggling to avoid failure, say others.

“If it’s not a global issue, it’s a national issue beyond the scope of any state,” said Senate Banking Chairman Bill Hamrick (R-Carrollton). He said it’s “a natural question” to wonder what Georgia’s lawmakers should do in the wake of the financial crisis, but argued that any action for now is largely up to federal and state regulators.

“There’s not much to be done at this point,” he said. “We’re not regulators. We’re policy setters.”

Hamrick said Georgia’s banking regulators already had the tools they needed to oversee the banking industry, but like most folks, failed to anticipate the depth or speed of the financial collapse and recession that began in late 2007.

“I think the economy set us up for what happened,” he said.

Lobby’s influence cited

But others wonder how much the influence of the state’s banking industry is affecting the legislative response. The industry is a big spender at the State Capitol and has numerous ties to lawmakers, from top leaders to the most junior freshmen.

Many of the potential fixes for the banking crisis are undeniably at the national level, said Kathy Floyd, a lobbyist with the American Association of Retired Persons in Georgia. But state legislators also are rarely friendly to proposals opposed by the banking industry, she added.

“Banks and bankers have such a powerful voice here, and they have such influence,” she said.

Indeed, the Georgia Bankers Association boosted its political budget last year by about 25 percent, spending more than $101,000, mostly for contributions to about 80 of the state’s 236 legislators. The trade group’s donations jumped even as overall political giving in the state dropped by more than a third from the busy 2008 election year.

Recipients of some of the largest contributions included a number of gubernatorial candidates: Lt. Gov. Casey Cagle, who got $4,513, Hamrick, who got $2,400, and fellow Senate Banking Committee member Chip Pearson, who got $3,000.

Dozens of legislators also have financial ties to banks, from being substantial investors to having key roles as founders or directors, according to an Atlanta Journal-Constitution analysis of lawmakers’ disclosure statements in 2008. Including family, job or business ties, nearly a third of the state’s lawmakers were cozy with the industry.

“It’s not any secret that banks wield a lot of power at the capitol,” said Danny Orrock, with the consumer advocacy group Georgia Watch. While industry lobbyists often give money to political leaders and legislators on key committees, the Georgia Bankers Association can afford to give to “back benchers,” said Orrock.

“It’s an expensive way to maintain influence, but it can be effective,” he said.

Georgia Bankers Association CEO Joe Brannen said the organization contributes to politicians’ campaign funds based on their leadership roles and “historical support of or interest in issues that are important to us.” But he said the money doesn’t sway lawmakers. “Our issues have to sell themselves,” he said.

Hamrick, a lawyer who hasn’t reported any significant ties to any banks, said he doesn’t believe lawmakers are unduly influenced by bank board seats or campaign money.

“I know it looks like it, but ... it’s just not a factor,” he said.

Feds taking lead

Currently, most of the effort to overhaul banking laws is taking place in Washington, D.C., where Congress is considering melding the federal government’s many financial regulators into one super-agency and creating a new entity in charge of consumer financial protections.

The FDIC and other federal agencies have likewise been tweaking banking rules to discourage risky behavior by financial institutions.

Last week, a congressional commission, the Financial Crisis Inquiry Commission, began its probe into the causes of the financial crisis.

“Anything that needs to be fixed is at the federal level,” said Brannen, with the Georgia Bankers Association.

That said, his group is seeking a change in state banking law to give relief to crisis-rattled banks, and a related bill seems to be off to a fast start.

Early last week, House banking committee chairman James Mills introduced a bill that would allow banks whose capital has been eroded by losses to renew certain large loans that are still in good standing. Within days, the committee approved the bill for consideration by the full House. Under current state banking rules, those loans can’t be renewed if they exceed lending limits based on the bank’s capital.

Brannen said the bill “would affect a fair number” of the state’s banks, but would make the state rule consistent with federal regulations. Many of Georgia’s banks have suffered heavy losses on real estate-related loans.

 

‘A little bit surprising’

Hamrick said lawmakers plan to work with state and federal regulators to tweak the state’s banking laws if needed. “We are open to any suggestions,” he said.

House committee chairman Mills did not respond to a reporter’s telephone calls.

Orrock, with Georgia Watch, said it’s “a little bit surprising” that there’s no big push to overhaul the state’s banking rules or to beef up the Georgia Department of Banking and Finance, the state’s bank regulator. (See accompanying story.) But that may be because the FDIC’s deposit insurance of up to $250,000 per individual account has saved most customers from losing any money when banks fail.

“If there are not a lot of constituents who are hopping mad, state legislators aren’t going to make it a priority,” he said.

Still, he does expect state lawmakers to look at some fixes. One option is legislation to require mortgage loan servicers to pay property taxes and homeowners insurance on time.

Orrock also hopes state representatives will take up a bill that passed the Senate but not the House last year; it would tighten lending standards for subprime loans.

“Having some underwriting standards on the riskiest loans would be a way to avoid a mess in the future,” he said.

 

Fixes won’t be easy

Other industry experts said there won’t be any easy fixes, since the next shock to the banking system will probably have a different cause.

“Nobody saw this coming,” said banking consultant Steve Johnson, with T. Stephen Johnson & Associates in Alpharetta.

Johnson said there’s plenty of blame to share for the financial crisis among banks, developers, borrowers and mortgage brokers.

Still, he said state and federal regulators also made Georgia’s banking industry more vulnerable by approving the creation of too many small banks over the past decade and allowing them to concentrate too much on real estate lending.

More than 100 new banks were opened in Georgia in the past decade, most under state charters. Eager to cash in on metro Atlanta’s recent population boom, many of the state’s small banks devoted up to 70 percent of their loan portfolios to funding real estate developers and home builders. By one measure, Georgia banks’ concentration on such loans grew six-fold, prompting warnings from federal regulators.

But now that the boom is over and the real estate market has collapsed in Georgia and the rest of the nation, banking fixes at the state level aren’t easy to come by, said Johnson.

“The state is powerless at this point to deal with it because it’s a national problem,” he said.