New York Community Bank, headquartered in Hicksville, experienced a significant downturn, with its shares plummeting by 31% over the past five days. The catalyst for this decline was Moody’s Investors Service downgrading the bank’s rating to junk status, specifically Ba2 from Baa3. This move came on the heels of the bank’s fourth-quarter losses related to its commercial real estate loans.
Moody’s also downgraded Flagstar Bank, NYCB’s lead bank, from A3 to Baa2, indicating broader concerns about the institution’s financial stability. The downgrade has sparked investor panic, reminiscent of the banking crisis that unfolded the previous year.
When it all started….
The troubles for New York Community Bancorp began with a steep fourth-quarter loss and a subsequent reduction in dividends due to increased provisions for losses in its commercial real estate loan portfolio. The bank’s shares witnessed a sharp decline, reaching 26-year lows and losing approximately 60% of their value within a week.
A significant factor contributing to the bank’s woes was the revelation that the value of its real estate loans had sharply decreased. NYCB responded by cutting dividends and setting aside half a billion dollars to guard against future losses. The earnings report identified specific loans, one linked to an office complex and another to a co-op residential building, accounting for up to $185 million in losses.
New Chairman tries to allay fears
The bank attempted to allay concerns about its financial health through statements and a last-minute call with investors. Alessandro DiNello, the newly appointed executive chairman, emphasized the bank’s strength and its commitment to rectifying the situation. However, investor confidence continued to erode, leading to a continuous decline in the bank’s stock value.
Moody’s downgrade highlighted various challenges faced by NYCB, including financial, risk-management, and governance issues. The agency cited increased risks from high interest rates and inflation, impacting the bank’s loan portfolio, primarily consisting of rental properties. NYCB’s annual provision for credit losses surged over 500% to $833 million, reflecting the heightened risks.
Is NYCB in a financially good position?
Liquidity concerns were also raised, with Moody’s noting that NYCB’s liquidity position was weaker than its peers due to a higher reliance on wholesale funding and a smaller pool of liquid assets. The downgrade to junk status could potentially hinder the bank’s ability to issue more debt, and a loss of depositor confidence poses a significant risk to NYCB’s liquidity position.
The recent turn of events has reignited fears of a broader banking crisis in the United States, reminiscent of the challenges faced in the previous year. NYCB’s unexpected quarterly loss and Moody’s downgrade have intensified worries in the market.
In response to the downgrade, NYCB emphasized its financial soundness, asserting that it has sufficient liquidity to cover deposits. DiNello assured investors that the bank would swiftly sell off assets or refinance its balance sheet to meet market demands. Despite these assurances, NYCB’s stock remained down over 55% in the past week.
NYCB’s transformation into a larger institution in 2023, following the acquisition of Signature Bank’s assets, has added to regulatory pressures. The bank had to cut dividends, increase capital, and liquidity ratios to comply with regulatory requirements.
Investors also expressed concerns about NYCB’s commercial real estate portfolio, as evidenced by a surprise fourth-quarter loss of $252 million, including a substantial provision for credit losses tied to real estate.
Despite market concerns, NYCB reported minimal deposit outflows, distinguishing itself from the fate of Silicon Valley Bank last year. The ratings agency Moody’s highlighted concentration in commercial real estate and a high level of uninsured deposits as key factors in the downgrade. NYCB responded, stating that 72% of its deposits are insured, and it maintains liquidity of $37.3 billion, exceeding uninsured deposits.
2023 Banking Crisis
In 2023, a notable banking crisis unfolded primarily within the United States, sending shockwaves throughout the global financial system. The crisis spanned five days in March, witnessing the failure of three small-to-midsize U.S. banks and subsequently causing a sharp decline in global bank stock prices.
Silicon Valley Bank (SVB), catering primarily to technology companies and affluent individuals, was the first to succumb. A bank run ensued after SVB incurred significant losses by selling its Treasury bond portfolio, raising concerns among depositors about the bank’s liquidity. The decline in bond values occurred as market interest rates rose following the bank’s shift to longer-maturity bonds.
Silvergate Bank and Signature Bank, both heavily exposed to the cryptocurrency market, also faced failure amid the turbulence in the cryptocurrency sector. Responding to these crises, the three major U.S. federal bank regulators announced extraordinary measures to ensure the honoring of all deposits at Silicon Valley Bank and Signature Bank.
To address the unfolding situation, the Federal Reserve initiated the Bank Term Funding Program (BTFP), providing loans of up to one year to eligible depository institutions using qualifying assets as collateral. In a collective effort to prevent further contagion, global industry regulators, including the Federal Reserve, Bank of Canada, Bank of England, Bank of Japan, European Central Bank, and Swiss National Bank, intervened by offering extraordinary liquidity.
Despite these interventions, depositors swiftly withdrew cash from San Francisco-based First Republic Bank (FRB), which specialized in private banking for wealthy clientele. Despite a $30 billion capital infusion from major banks in March, FRB continued to face instability, leading to a plummet in its stock price. In response, the FDIC prepared to take FRB into receivership and find a buyer. On April 29, the FDIC announced the closure of First Republic, with JPMorgan Chase emerging as the buyer.
