A new study from the University of West Georgia’s Center for Business and Economic Research finds that government regulations placed on community banks just before the crisis might have speeded their decline.
The research looked at how the mark-to-market rule, requiring banks to write down the value of real estate assets immediately rather than amortizing the loss over time, hurt smaller banks. The rule was required even if mortgages on the assets were being paid in full. According to the study, many banks likely failed unnecessarily.
“In 2006 the mark-to-market rules was expanded to cover more assets,” said Dr. Joey Smith, head of UWG’s Center for Business and Economic Research. “The impact on banks of that new rule was pretty substantial. What the study did was look at stock prices for 134 community banks. We found that the value of banks stopped declining when the mark-to-market rule was finally relaxed in the spring of 2009.”
More than 80 banks have failed in Georgia since the financial crisis began, the most of any state in the nation.
Along with Smith, the study was carried out by Danny Jett, a founding board member of Main Street Solutions. Main Street is a nonprofit think tank that provided a grant for UWG to conduct the research.
“The regulations were put into effect primarily to benefit the investor,” Smith said. “Ironically, the investor responded positively to a relaxation of the rules.”
The study found that for every Georgia banking job lost, 1.26 jobs were lost in supporting industries. It also found that local communities in the state lost a combined $78 million in property taxes from the crisis.
According to the research, state income tax collections fell by $47 million and sales tax revenue losses totaled $93 million.
“It is fair to say the regulation put banks at a disadvantage,” said Smith.
Community banks were hit harder by regulations like the mark-to-market rule than large “megabanks.” This was compounded by the fact that smaller banks didn’t receive any bailout funds from the federal government.
“Some of the banks were so large that the government decided they were too big to fail,” Smith said. “Making that determination kept a lot of those large banks from feeling the kind of pain the smaller banks did. ... If you look at the banks that went under in Georgia you’d be hard pressed to find any that were helped by the Troubled Asset Relief Program.”
Smith said community banks are vital to a community because they often are the source of loans for small businesses, which are left with fewer choices when banks fail or are bought by larger banks. He feels that regulations are necessary, but should sometimes be relaxed in times of crisis.
Rules like the mark-to-market rule were originally meant to rein in the volatile commodities future trading markets in the wake of the Enron scandal, the study holds, but relaxing it could benefit smaller banks in particular because they have more exposure to real estate loans than large banks.
“I’m not suggesting we do away with mark-to-market,” Smith said. “In situations where we’ve got an emergency there should be something in place allowing us to relax it when necessary.”
While it’s too late for banks like the local Community Bank of West Georgia, Smith said the research can benefit the banking industry going forward.
“We could put in place maybe a set of steps in the case of something similar to our financial crisis happening again,” said Smith. “We should have the ability to more flexibly relax some of the accounting rules that govern the way banks put value on their assets.”