Paul Krugman weighed in on why Georgia has seen so many bank failures in his New York Times article last week . He correctly points out that Georgia leads the nation with 37 busted banks since the beginning of 2008. Then he wonders why Texas hasn’t had as many failures, even though the two states are similar, or in his words “Flatland states.”
“The most likely answer, surprisingly, is that Texas had strong consumer-protection regulation,” Krugman writes. The Nobel prize winner claims the wise law makers in Texas “made it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages.”
Sure enough, Texas has experienced less than a third the bank failures as Georgia, but two of the Texas failures–Franklin Bank and Guaranty Bank–totaled over $18 billion in assets and 149 branches in the lone Star state. None of the Georgia failures were even close in size.
As Krugman himself points out, “Georgia suffered, if anything, from a proliferation of small banks.” Indeed, 112 banks have been chartered in Georgia since 2000, hoping to capitalize on Georgia’s population boom. Also, up until the late 1990’s, Georgia didn’t allow banking across county lines. And since Georgia has 159 counties, that means there are lots of small banks that were dependent on the Georgia boom and suffering the bust. At the end of last year there were 305 state and federally chartered banks in Georgia.
Of the these 305 remaining banks, only 16 have assets greater than $1 billion, according to the FDIC.
And the concentration of consumer loans at these Georgia banks is slight at 26.2% of Total Risk-Based Capital as opposed to commercial real estate concentration which is 364.9% of Total Risk-based capital. By the way, Texas banks have a higher concentration of consumer loans at 42.9% of Total Risk-Based Capital.
Predatory lending doesn’t explain the problem or solution, Austrian Business Cycle Theory does.
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