Georgia's Recovery Stalled by Troubled Banks

Georgia's recovery is contingent on a healthier banking system.  In the November 29th, 2010 article from TheStreet, we can see that Georgia banks are still vulnerable.  They have the 41 banks that are considered undercapitalized which is more than double than Florida, which has the second most troubled banks.  One can mainly attributed the troubles to the Atlanta housing market and deregulatory environment as described by NY Times columnist, Paul Krugman, and his "Georgia On His Mind" article on April 11th, 2010.

When looking at the last recession, it should be noted that it mainly affected major metro areas.  Typically, it involved areas where housing prices skyrocketed and ultimately creating an asset bubble that burst.  However, Atlanta did not experience this type of price acceleration due to urban sprawl.  Instead, a large number of new banks popped up, and in their haste to boost market share, they engaged in unsafe banking practices.  As surmised by Krugman, lax consumer protection laws which allowed Georgia borrowers to obtain additional funds by increasing the size of their mortgages.  When the economy took a plunge, many of these mortgages started to go under water.  As shown by Forbes Best Places for Business and Careers, you can see that Atlanta ranks 136th out of 200 metro areas in the number of subprime mortgages which represented 13.6% of all originations between 2006 and 2008.  Subprime mortgages are an indication of overall credit quality and negatively impact bank performance.

With the latest figures in home prices, we can see that Atlanta has not yet recovered from their pre-recession levels. A look at S&P/Case-Shiller U.S. National Home Price Index for the 3rd quarter of 2010, we can see that Atlanta's home prices have declined by 3.1% over the last year.  In addition, the November 30th, 2010 edition of the Atlanta Business Chronicle reports from Brookings Global MetroMonitor how much Atlanta has fallen over the last few years.  Compared to 2007 where Atlanta's economic performance ranked 57th overall, they now stand at a lowly 136th as rising unemployment and income declines hamper current activity.  All of these indicators need to improve in order to improve the health of Georgia's banking system.

In order for the banking system to improve, bank management will need to be more prudent and take on less risk.  They will need to find ways to raise capital and instill more investor confidence.  As of right now, their focus should be installing more effective risk management and loan underwriting systems in order to minimize credit problems in the future.  Lastly, it might be helpful for the state legislature to take a more proactive approach in implementing stronger consumer protection statutes in order to prevent a similar meltdown from occurring in the future.