Small businesses feel banks’ pain

By Brian Olasov

The FDIC recently closed its 22nd, 23rd and 24th banks in Georgia this year — more than any other state in the country. The populist response to these banking failures — and the broader financial crisis — has been to lump financial services firms together indiscriminately and rail against excessive bonuses, risk-taking and “bail out” money many of these firms received under the TARP program.

Of course, for the investors, employees and directors of these institutions, a bank failure can be a personal tragedy. But what about the rest of us? Should the average Georgian care about these closures? Aren’t they merely the discipline of a free market?

If we care deeply about restoring growth to Georgia, the answer is that we should also care deeply about the outlook for Georgia’s banks.

The gut-wrenching turmoil of the past 15 months — the “post-9/15” world following Lehman Brothers’ bankruptcy — demands explanations, investigations and policy responses. But before we ascribe blame, we also must focus on a couple of important truths and their critical implications.

First, the small banks that are being closed in Georgia bear little responsibility for the financial crisis. Their executives are not looking for multimillion-dollar bonuses, nor are they responsible for engineering opaque mortgage-backed securities or for leveraging up their balance sheets by billions of dollars.

More importantly, the private economy cannot get back on its feet without a healthy banking system. When banks close their doors or restrict credit, greater numbers of small businesses shrink and fail. These engines of job growth sputter and their communities suffer a slow bleed. In a state as hard hit by bank failures as Georgia, this is acutely true. Regardless of whether one sympathizes with the plight of financial institutions, their fates are closely tied to our own — especially so in rural areas with few lending choices.

Bank failures in Georgia have resulted largely from lending concentrations in residential development and commercial real estate. This cycle has not yet fully run its course. Dozens of additional Georgia banks are either under formal regulatory agreements or fear they soon will be.

In a time of heightened anxiety, a banker’s natural impulse is to tighten lending standards, cut lines of credit and shift assets to cash and government securities. Regulators may impose this conservatism on banks unilaterally. While understandable from the banker’s and regulator’s perspectives, these actions leave small businesses with few borrowing options.

In a recent speech, Federal Reserve Bank of Atlanta President Dennis Lockhart noted the connection between real estate and small-business borrowing: “Banks with the highest [commercial real estate exposure] account for almost 40 percent of all small-business loans.” Unfortunately for communities that rely on banks with heavy concentrations of real estate loans, these banks frequently operate under an agreement with regulators that sharply limits any new lending, whether related to real estate or not.

Consider the shrinking availability of business credit. From Sept. 30, 2008, to Sept. 30, 2009, business loans outstanding declined 15 percent nationwide and nearly 18 percent among Georgia banks. For the same period, lines of credit were cut roughly 12 percent nationally and more than 10 percent in Georgia. When credit dries up, so does capital investment — and jobs.

Nor are consumers immune from the credit crunch. In the 12 months ending Sept. 30, credit available under credit card lines shrunk by more than $1 trillion nationally.

Both sides of the political aisle realize that government stimulus by itself cannot revive private-sector job creation. Banks must be free to resume responsible lending. In recent days, everyone from the chair of the FDIC to the treasury secretary to President Barack Obama has called on banks to meet the reasonable credit needs of their communities. Unfortunately, these calls are too often undercut by other calls, particularly from regulators who require many banks to shrink their loan portfolios and raise new capital under penalty of failure.

Until regulators and policy-makers speak with a unified voice and address the danger posed by this onslaught of failures, many of our state’s banks — and their communities — will continue to suffer together.

Brian Olasov is a non-lawyer managing director with McKenna Long & Aldridge LLP where he focuses on real estate credit issues, banks and capital markets. He is also an adjunct professor at Emory Law School. The views expressed are his own.