Krugman on the banking crisis in Georgia
Paul Krugman weighed in on why Georgia has seen so many bank failures in his 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鈥檛 had as many failures, even though the two states are similar, or in his words 鈥淔latland states.鈥�
鈥淭he most likely answer, surprisingly, is that Texas had strong consumer-protection regulation,鈥� Krugman writes. The Nobel prize winner claims the wise law makers in Texas 鈥渕ade it difficult for homeowners to treat their homes as piggybanks, extracting cash by increasing the size of their mortgages.鈥�
Sure enough, Texas has experienced less than a third the bank failures as Georgia, but two of the Texas failures鈥�Franklin Bank and Guaranty Bank鈥搕otaled 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, 鈥淕eorgia suffered, if anything, from a proliferation of small banks.鈥� Indeed, 112 banks have been chartered in Georgia since 2000, hoping to capitalize on Georgia鈥檚 population boom. Also, up until the late 1990鈥檚, Georgia didn鈥檛 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 .
Of the these 305 remaining banks, only 16 have assets greater than $1 billion, .
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 .
Predatory lending doesn鈥檛 explain the problem or solution, Austrian Business Cycle Theory does.
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