Critics: Banking agency lacks bite

State regulators issued a prescient warning to Georgia banks three years ago. If they kept lending mostly to real estate developers, the banks were told, they risked huge losses, or even failure, if the housing bubble burst.

The warning, however, was just that. Coming from the Georgia Department of Banking and Finance, it carried no weight. Many banks merely broadened their pool of borrowers to include more developers. Others disregarded the admonition altogether.

The response illustrates the banking department’s limited authority over the institutions it is charged with regulating. A lack of strong enforcement powers, coupled with what critics see as a lack of will, kept the agency from preventing or even alleviating the crisis that hit the state’s banks this year.

Five Georgia banks failed in 2008, one-fifth of the 25 that collapsed across the country this year. Dozens more Georgia banks continue to struggle, posting losses as big borrowers fall further behind on loan payments.

But as the calamity worsened, the banking department mostly watched from the wings, moving in only as a financial institution reached the brink of insolvency.

Banking experts say the agency could have forced banks to tighten lending requirements, insisted on more professional management and required banks to increase reserves to cushion against loans gone bad.

“They should be more aggressive,” said Eugene Elander, a longtime banker and professor who teaches at Brenau University in Gainesville. “Even if it wasn’t that vital five to 10 years ago, it certainly is now. They could do their job better, even with limited resources.”

Consumer advocates complain that a complacent attitude at the banking department created an atmosphere in which rogue banks faced no consequences. Allison Wall and Danny Orrock of the nonprofit advocacy group Georgia Watch said the department has resisted overtures by lawmakers and others to expand its regulatory authority.

“If they don’t have enough eyes to watch over the flock,” Orrock said, “some of the flock may go astray.”

State officials say they knew that certain banks were vulnerable to failure. Some had devoted 80 percent or even more of their loans to real estate development, by its nature a speculative venture. As recently as April, the banking department urged banks to follow “best practices for dealing with heightened levels of asset quality issues.” But like others, this missive contained only suggestions, no mandates.

Still, officials point to such letters as evidence of efforts, however gentle, to rein in wild lending practices.

“There were guidelines out there,” Rob Braswell, the state banking commissioner, said in an interview. “There were recommendations made by various regulatory agencies.”

Many banks chose not to listen, he said, and the department didn’t force the issue.

“You’re getting into managing a bank at that point,” Braswell said, “as opposed to regulating it.”

Braswell’s agency says it holds Georgia’s 278 state-chartered banks to high standards. But it is largely a trust-us regulatory system, with little data made available for public inspection.

The agency refuses to identify troubled banks. It has never released details of consumer complaints. And now, because of state budget cuts, it no longer even accepts them.

‘So much money’

Braswell attributes Georgia’s disproportionate number of bank failures to the explosion of new banks that accompanied the region’s housing boom.

Dozens of financial institutions formed in recent years —- 21 in 2006 alone —- as Georgia ended up with more banking companies than California, Florida or New York, among many other states.

Many of these new banks were created by developers for developers.

Few wrote mortgages for individual homeowners. Instead, their lending enabled the construction of entire new communities, many of them sprawling across the outer ring of Atlanta’s northern suburbs.

Braswell doesn’t fault the banks for following this business model. Housing prices, he said, were still increasing, despite nagging concerns about inflated values.

“It was very difficult for many banks not to become overreliant on these loans,” he said, “when there was so much money to be made.”

With about 140 employees and an annual budget of about $12 million, Braswell’s agency supervises state-chartered banks —- those organized under Georgia law. Federal agencies oversee banks and savings and loans with national charters.

Braswell’s goal as a regulator, he said, is to “maintain confidence and integrity in the system.”

How he does that, however, is mostly shielded from public view.

For instance, the department keeps a list of at-risk banks. But officials will say little about the list beyond acknowledging that it exists and that it is growing.

“It’s not a public list,” Braswell said.

“I don’t want to create undue alarm among depositors,” he said. “There’s a lot of good things still happening out there to address the concerns in this environment.”

Disclosing the mere fact that a bank is on a watch list, Braswell said, could have devastating consequences, such as a run on deposits.

“Someone who is not a regulator could misinterpret why a certain bank was on the list,” he said. “People would draw incorrect assumptions.”

If consumers want more detail, he said, they could study banks’ financial statements. The arcane, number-laden reports are posted quarterly on the Federal Deposit Insurance Corp.’s Web site (www.fdic.gov).

The FDIC also keeps a list of troubled banks; it had 171 on Oct. 31, up from 65 a year earlier. The agency won’t name the institutions.

‘Nothing to worry about’

Consumers rarely know a bank is in danger of failing.

The way state and federal regulators handled the collapse of the five Georgia banks was typical, officials said. When insolvency seemed inevitable for each bank, regulators quietly shopped its deposits and assets, such as its outstanding loans, to other institutions.

Once deals were arranged, the FDIC announced —- after the close of business on a Friday —- that the troubled bank had closed. Each reopened under a new name and new management the following Monday.

Depositors could barely tell a difference. Banking services, such as direct deposits and automatic bill payments, continued without interruption. The new owners assumed the failed banks’ deposits. Even if they hadn’t, most deposits would be safe, now insured up to $250,000 by the FDIC.

Shareholders, however, lost most or all of their investments in the failed institutions, and customers whose deposits exceeded the insurance cap may not recover all their money. The FDIC pays uninsured depositors only as it disposes of a failed bank’s assets, said David Barr, an FDIC spokesman in Washington. On average, Barr said, those depositors collect about 72 cents for every $1.

As it prepares to take over a collapsing bank, the FDIC tries to maintain total secrecy. An expected bank failure “causes undue concern for the customer,” Barr said. “In reality, they have nothing to worry about.”

Last summer, Barr said, news leaked about the imminent failure of IndyMac Bank in Pasadena, Calif., causing depositors to wait in line to withdraw their money. Many, Barr said, stashed it in a nearby institution —- Washington Mutual, which soon went under in the largest bank failure in U.S. history.

‘Not a core program’

In 2007, the state banking department says, it received more than 6,000 complaints about financial institutions, and it investigated more than 1,400 written complaints.

The department won’t say, though, which banks were involved. Nor will it disclose details of the complaints or their resolution.

Late this summer, the department stopped accepting complaints. Now it only refers consumers to other government and nonprofit agencies.

Gov. Sonny Perdue ordered spending cuts across state government, but he told department heads to spare “core” programs, said Braswell, the banking commissioner. In his agency, Braswell defined those as “regulation and supervision of the entities we regulate.”

“One program that was not a core program … was our consumer affairs area,” he said. “So that’s where we chose to make our cuts.”

Elander, the retired banking professor, rebuked the agency in an op-ed article published Sept. 18 in The Atlanta Journal-Constitution. “The proper investigation and necessary action on individual complaints,” he wrote, “is what government banking departments … are all about.”

After the piece ran, Elander said in an interview, a banking department employee called to ask for alternatives to the cuts. Elander suggested pay cuts for the agency’s top officials.

A few weeks later, he said, the agency responded. It had decided not to follow his suggestion.

GEORGIA BANK FAILURES, 2008

Aug. 29: Integrity Bank, Alpharetta

Oct. 24: Alpha Bank & Trust, Alpharetta

Nov. 21: The Community Bank, Loganville

Dec. 5: First Georgia Community Bank, Jackson

Dec. 12: Haven Trust Bank, Duluth

GEORGIA BANK FAILURES, BY YEAR

> 2000: 1

> 2001: 0

> 2002: 1

> 2003: 0

> 2004: 0

> 2005: 0

> 2006: 0

> 2007: 1

> 2008: 5*

U.S. BANK FAILURES, BY YEAR

> 2000: 7

> 2001: 4

> 2002: 11

> 2003: 3

> 2004: 4

> 2005: 0

> 2006: 0

> 2007: 3

> 2008: 25*

* Through Friday

Source: Federal Deposit Insurance Corp.