University of West Georgia Research Suggests Regulatory Burden is Harming Smaller Banks and Georgia'


University of West Georgia Research Suggests Regulatory Burden is Harming Smaller Banks and Georgia's Economy

Jobs, tax revenue stand to gain from simple change in accounting rules

DOUGLASVILLE, Ga.--(BUSINESS WIRE)-- Main Street Solutions, a non-profit Georgia think tank, today announced the results of research conducted by the University of West Georgia's Richards College of Business and its Center for Business and Economic Research that suggest regulatory failure in the form of the mark-to-market accounting rule could be hampering Georgia's economic recovery. The rule requires banks to write down the value of real estate assets, rendering them worthless on paper even if they are still performing from a cash-flow perspective. More than 80 banks have failed in Georgia since the banking crisis began, many of them community banks.

According to the research, relaxing the mark-to-market rule, originally meant to reign in the volatile commodities future trading markets in the wake of the Enron scandal, could benefit smaller banks in particular because they have more exposure to real estate loans than large banks. Many community banks in Georgia that failed could likely have survived the banking crisis were it not for the unintentional application of this accounting rule, which forced them below the capital ratio required by regulators.

As a result of the regulation, many small banks in Georgia were sold at a steep discount to out-of-state competitors or closed down, eliminating jobs and harming small businesses that lost access to the local bankers who had provided them with lines of credit.

"Our research demonstrates that regulations matter," said Dr. Joey Smith, director of the Center for Business and Economic Research. "At a time when banks - especially smaller ones - needed greater flexibility so they could weather an economic storm, the mark-to-market rule proved to be unforgiving. As a result, many banks failed or were sold unnecessarily, causing harm to the stock holders, employees and small businesses that relied on them."

Small businesses have been hit hard by community bank failures. Banks with assets of less than $10 billion saw their Small Business Administration (SBA) loan volume drop $30.5 billion between 2006 and 2011. The impact on jobs has also been significant. The banking industry alone shed 16,000 jobs during the crisis. Furthermore, for every banking job lost in Georgia, 1.26 jobs were lost in other industries. These job losses and the resulting diminished business activity also hurt state and local tax revenue.

"Regulations are important in banking, but that doesn't mean they are always appropriate or that they all work," Dr. Smith said. "To offer a more recent example, even Barney Frank, co-author of the Dodd-Frank financial reform bill, now admits that rather than helping consumers, the provision in the Dodd-Frank bill that regulates debit cards is actually harming consumers. So I'm hopeful there is a new willingness to re-think regulations such as the mark-to-market rule."

The University of West Georgia is located in an area that saw numerous bank failures. Other states with a weak banking industry that could likely benefit from a change in the mark-to-market rule include California, Nevada and Arizona, among others.

The research, made possible by a grant from Main Street Solutions to the Center for Business and Economic Research, can be found at under the Business Sense section.

Main Street Solutions

Main Street Solutions, a not-for-profit Georgia think tank, focuses on advancing sound public policy consistent with free enterprise principles. The organization provides grants for research to study the impact of public policy on the lives of individuals, small businesses and government institutions. In addition, Main Street Solutions seeks to inform citizens and elected leaders about how policy influences Georgia's economy and the lives of its residents.

The University of West Georgia

The University of West Georgia is the land of opportunity for approximately 12,000 undergraduate and graduate students in 97 fields of study. The university is known for its innovative approach to scholarly achievement, creative expression, and service to humanity. It is recognized by U.S. News & World Report magazine as the #46 public university in the South.

Founded in Carrollton, Ga., in 1906, UWG also offers classes at its Newnan and Douglasville centers and online. For more information, please visit


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