Every Bank Failure Is Also a Beginning

The Community Bank of Loganville, Ga., helped to fund the transformation of rural Walton County to a booming Atlanta suburb. It lent hundreds of millions of dollars to people building houses, building churches, building strip malls.

When federal regulators seized the bank in November, it appeared that Loganville had lost an engine of its economic growth.

But participants in this episode and experts said the bank's failure is more accurately described as a restart. More than a third of the Community Bank's loans were not being repaid, starving it of money to make new loans. When the government seized the bank, officials stripped away those loans, then sold the branches and deposits to a Virginia company, Bank of Essex, creating what amounts to a new bank with abundant money for lending.

"Communities suffer more from an ailing bank than from a failed bank," said Gary A. Simanson, vice chairman of Community Bankers Trust, which owns Bank of Essex. The company also bought the failed Suburban Federal Savings Bank of Crofton, in January. "When a bank fails, it gives someone else the chance to start fresh. Now we're here, and we want to lend."

Regulators have seized 42 banks since the beginning of 2008, including another in Georgia last night. The rapid increase often is portrayed as a sign of the nation's economic distress. It is also a first step toward revival. Restarting a bank is expensive and painful for many, including the former owners and borrowers. Economists say the transition takes a measurable toll on local economies, for example by requiring businesses to win the trust of new bankers. But in wiping away problem loans and bringing in new investors, the government is creating the necessary conditions for new lending.

"That's one of the most positive things that we do," said Mitchell Glassman, director of resolutions and receivership at the Federal Deposit Insurance Corp., which handles bank failures. "This is our way of trying to help communities and businesses."

A bank failure is a ritual process. Government officials walk into the lobby on Friday afternoon, about five minutes before closing time. When the last customer leaves, a state or federal regulator announces that the bank has been seized. An FDIC official announces that it has been sold. The new owner, generally another bank, is introduced. The rest of the weekend is a race to reopen the branches Monday morning.

Regions Bank bought two failed banks in the past six months, both in the Atlanta area. On a Friday in early February, Bill Linginfelter, the top Atlanta executive for Regions, walked into FirstBank Financial Services in McDonough, Ga., shortly before 5 p.m. and tried to reassure the gathered employees. Ninety minutes later, a crew arrived to raise temporary Regions signs. Another crew reprogrammed the ATMs. New computers were installed.

On Saturday, Linginfelter stationed employees in the parking lots outside each branch. "People would drive by and roll down the window and say: 'What's going on? Is my money safe?' And we'd say, 'Yes,' and they'd keep driving," Linginfelter said.

On Sunday afternoon, Regions held a meeting for its new employees. A manager at another failed bank acquired last fall by Regions had volunteered to speak. Then Linginfelter answered questions, assuring employees that they could keep serving popcorn in the lobby.

The next morning, Regions opened its new branches.

The process was not always so smooth. During the Great Depression, bank failures ripped holes in local economies. Depositors lost money. Businesses lost access to loans. A famous 1983 paper by Ben S. Bernanke, now chairman of the Federal Reserve, argued that bank failures were a key reason for the depth of the nation's economic suffering. Bernanke, then a professor at Stanford University, wrote that businesses were unable to borrow money just when they needed it most.