Georgia Banking Chief Discusses Difficult Road for State's Banks

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Robert Braswell has experienced trying times as the banking commissioner for Georgia, where 74 banks have failed since 2008, more than any other state.

Braswell says the Georgia Department of Banking and Finance has learned a lot from the experience. Now, it is trying to put those lessons learned into action, emphasizing corporate governance and risk control. Georgia is still recuperating and Braswell remains cautious about 2012.

Here is an excerpt from a wide-ranging interview:

What are the greatest challenges facing Georgia banks?
BRASWELL: I think one of the stiffest challenges will be to find a healthy, familiar market segment in which to lend to replace the acquisition, development and construction loans that comprised so much of their portfolios in the past.

I think it will be a challenge for boards and shareholders to come to terms with a new normal in the years ahead in which return on equity is markedly lower than it was 5-10 years ago. It's still to be determined what that new normal is. In the heyday, people expected ROE in excess of 15%. Those days are long gone. I think shareholders, board members and management all have to ratchet back. Banks should re-evaluate their business plans and ensure that they do not stretch out of their level of expertise or compromise underwriting principles for the sake of revenue in the short term.

What are your office's goals for 2012?
Further developing our Early Warning System, with an emphasis on sharing and applying lessons learned in an educational format with financial institutions and our examiners. Secondly, we want to continue working as a member of the Conference of State Bank Supervisors' Community Bank Committee to identify state or federal laws, regulations or policies that are impeding community banks' ability to serve their communities effectively.

What is the Early Warning System?
We did a post-mortem review of all Georgia state-chartered banks that failed as well as a review of similarly configured banks that did not fail to see the difference between …the two categories of banks and what the failed banks could have done differently and what we could have done differently. Through that, we internally developed a dashboard to more efficiently monitor statewide trends among financial institutions and began an educational outreach, including publishing a series of related articles in our bulletins once a month.

The series includes topics regarding risk mitigation through control features like internal audits. We also started quarterly meetings with examiners within each of their districts to go over trends and any issues they are seeing that may be developing in one part of the state and not the other. The dashboard is still in its infancy stages but I'm sure it will grow over time.

What lessons have your office learned?
We're still analyzing what has happened and is happening. …A lot of it dealt with corporate governance issues and insuring everybody understands their roles, especially the board since management reports to them. That's one of the reasons why we did a series of articles, including [one] on having a control environment to mitigate risk.

We've looked at simple things like monitoring loan concentrations more closely and limiting the amount of concentration, not just based by builder or by the subdivision. but by the industry. We look for banks to price products according to their business model and don't let your competitor drive your pricing. …When considering a loan, we've asked banks to look at what the borrower's global cash flow is, what's the total relationship as opposed to the single loan. Our examiners have become more aware of these situations, have asked those types of questions, and are seeking those types of things.

How is your office addressing the bank failure rate?
The Department is working with the industry to strengthen governance practices and systems of internal control to better position banks to weather future economic downturns and shocks.

Could the office have done something differently to prevent those failures?
It was not a something the banking department or the federal regulators did or didn't do. I think our banks reflect the economy in Georgia. When the subprime market collapsed, it had such direct effect on the housing market and the acquisition-and-development loans being made by banks in Georgia.

In a state that thrived off real estate, what other loan options do banks really have? Do they just wait for it to return or is A&D long gone, and they will be forced to find a new growth industry in the future?
One of the challenges now for banks is finding other areas …to fill the balance sheet. The regulators just want them to have quality loans that are performing well. It doesn't matter what kind, but with the real estate market still ebbing out of a deep recession, a vast majority will not be in acquisition-and-development loans for quite some time.

Georgia is suffering through several problems. We are one of the highest unemployment-rate states, our real estate markets have not stabilized yet, and we've had a very substantial reduction in migration into the state. Those three factors are very difficult headwinds to go against.

Many bankers say it is difficult to determine property valuations and to classify assets. Why is it so difficult?
Real estate valuations are difficult to determine due to a dysfunction in current real estate markets along with a substantial portion of Georgia's real estate sales composed of distressed properties. There is an indication of some stability and even improvement in certain submarkets, but the level of shadow inventory, along with continued foreclosures, will continue to present a headwind to restoring Georgia's real estate market.

How many examiners does your office have? Is it enough?
Our agency has 63 bank examiners. Of course, it would be beneficial to have additional examiners, particularly during the challenging banking environment currently facing Georgia. Like many state agencies in Georgia and across the country, our budget has been reduced due to economic challenges. However, we have tried to mitigate the impact on our examination program as much as possible by making the vast majority of our reductions in other areas.

Many bankers are concerned about overregulation. How is your office addressing these concerns?
The tough thing about being a regulator is either you're over-regulating according to one side and under regulating by the other side. …We just have to walk the line that we feel is appropriate and ensure the safety and soundness of our financial institutions.

In the compliance area, it would be good to see what can be reduced or eliminated. Each time there is a compliance issue, it seems more are always being added and none are ever dropped or eliminated. For all banks, that has become more expensive and more onerous to comply with, especially the smaller community banks. …I've heard anecdotal stories where a $70 million-asset bank — now with new compliance requirements coming down — requires more than two employees full time to handle compliance issues. With the startup of the [Consumer Financial Protection Bureau], banks are concerned about additional compliance requirements being initiated.

Are you seeing changes in the capital-raising capabilities of community banks? Is there anything your office can do to address capital concerns?
Capital raising by community banks continues to be a challenge. Investor confidence has been impacted by writedowns on foreclosed real estate and impaired real estate loans, which are exacerbated by pro-cyclical accounting standards. The Department works promptly and cooperatively with banks and potential investors in an effort to restore the health of Georgia's banking sector.

Has your office had discussions with federal regulators about this concern?
The Department has very cooperative working relationships with federal regulators, and our joint efforts have been successful in reviewing and approving new investors or capital raising plans in a timely manner in a number of instances, but hurdles in the approval process remain. Of particular challenge are investments involving private equity and foreign funds.

Should there be a uniform capital ratio standard?
Capital requirements should be aligned to the risk profile and business strategy of a financial institution, along with consideration of the systemic threat that a particular institution may present. In my opinion, a one-size-fits-all capital standard would be contrary to the regulatory purpose of capital in the banking sector.

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