Q&A: Robert Braswell of the Georgia Department of Banking and Finance

Some critics have said Georgia banking regulators deserve part of the blame for the high number of failures and problem banks in the state. Robert Braswell, commissioner of the Georgia Department of Banking and Finance, declined a sit-down interview but answered questions in writing about the state of banks under his purview.

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Joey Ivansco / jivansco@ajc.com

Georgia banking Commissioner Rob Braswell in his office Feb. 12.

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Q: Georgia trails only California in the number of failed banks, and Georgia is far and away the leader in troubled banks, according to a recent analysis. How do you explain what’s happened to the state’s banking industry?

A: First of all, it’s not all doom and gloom for Georgia’s banking industry. People should understand that there are 275 state chartered banks and 39 national banks in Georgia, and the vast majority… are very stable and remain well capitalized.

Secondly, banks generally mirror the economy; therefore, the banks that are struggling are doing so in large part due to the distressed housing market in Georgia, and more particularly in metro Atlanta. Unfortunately, other sectors of the economy are also now faltering in Georgia and across the nation, which compounds the problem.

Lastly, Georgia has a large number of relatively small banks in comparison to many other states. The combined assets of the banks that failed in Georgia pales in comparison to just one IndyMac or Washington Mutual, for example.

Q: Many Georgia banks concentrated lending in real estate, especially residential. Shouldn’t state regulators have stepped in to prevent this from happening?

A: No, I don’t think so and I believe bank management would tell you the same thing because our role is as a regulator and not as a manager. It’s important to put your question in the proper context: (1) There are no state or federal laws or regulations limiting the percentage of real estate-related loans a bank may have in its loan portfolio; (2) the vast majority of banks tried to limit their risk by diversifying their real estate loans among many credit worthy builders, developers and projects; and (3) our state’s real estate market had been thriving for 15 years due to the influx of people moving into Georgia; therefore, the acquisition, development and construction loans that banks were making had been very profitable for many years and supplied the gas to our state’s economic engine. In addition, concentration exposure was frequently addressed during the examination process by State and Federal regulators and as a result, those exposures were less and better managed than they otherwise might have been.

Q: Other regions have experienced a similar real estate boom and bust as Georgia, such as Florida, Arizona and Nevada. Yet those states haven’t seen the number of bank failures as Georgia. Can you explain why?

A: The three states you mentioned have had their share of troubled institutions as well. In fact, even though Georgia has more banks than Florida, each state has had the same number — six — of community bank failures since 2002. Nevada has only 38 banks but had two community banks fail in 2008; and Arizona has only 54 banks with its latest bank failure being in 2002; so in actuality Georgia has had a smaller percentage of community bank failures than Florida and Nevada; and the same percentage as Arizona since 2002.

Q: Since 2002, metro Atlanta leads the nation in the creation of new banks. Was it too easy to start banks here? Did regulators provide enough scrutiny?

A: It always has been and continues to be quite an extensive process to receive approval for a state bank charter in Georgia. An applicant must also receive approval for insurance from the FDIC. Our agency and the FDIC conduct separate, but concurrent investigations into the suitability of the applicant meeting all the required standards. The large number of new charters in the metro area from 2004 - 2007 was more reflective of the interest people had in entering the Atlanta market as opposed to a commentary on the application process. In fact, seven formal applications have either been denied, asked to be withdrawn or not accepted by our agency since 2004, and many other groups that met with us never formally applied due to the likelihood of being disapproved.

Q: Some banks have run into trouble by depending too much on so-called brokered deposits instead of more stable “core” deposits such as local checking and savings accounts. Did regulators let banks rely too heavily on brokered deposits?

A: Since consumers’ rate of savings has steadily diminished for many years now, banks have had to supplement core funding with a variety of wholesale funding sources, including brokered deposits, to keep pace with loan demand. Regulators, in turn, frequently directed bank management and the Board to establish limitations on these funding sources both individually and in the aggregate. Additionally, one of the components that is rated during an examination is a bank’s liquidity; and a major aspect of liquidity that is reviewed closely is a bank’s level of dependency on core funding versus non-core funding such as brokered deposits. Additionally, we provided banks a copy of our policy and procedures assessing liquidity via our May 2003 Bulletin, which clearly outlines our emphasis on an appropriate level of “core” liquidity for a satisfactory rating.

Q: If you were able to step back to the beginning of the housing boom, would you have done anything differently?

A: As with past economic downturns, there are lessons to be learned. Two that come to mind immediately are (1) the fact that local banks are not insulated from being affected by risks taken by other sectors of the financial market; and (2) that we as regulators must ensure a bank has a full understanding of a borrower’s total financial condition when underwriting a loan as opposed to the “silo” method, which primarily just takes into account a borrower’s ability to repay and/or collateralize that loan without giving full consideration to other debt the applicant may already have at another institution.

Again, it’s important to remember most commercial banks acted responsibly, did the proper underwriting and tried to limit risks; but have been negatively impacted by the effect that the subprime mortgage fallout had on the housing market and real estate values in general. I think it’s important for people to know that their local bank did not make the “subprime” loans that started this snowball rolling.