Why a shaky bank raises fears of a bigger financial mess
As we approach the one-year anniversary of a crisis that brought down several mid-sized banks, problems at another lender are once again bringing unwanted attention to the sector.
Concerns now center on New York Community Bancorp, which operates about 400 branches nationwide under brands such as Flagstar Bank and Ohio Savings Bank. The bank has grown dramatically in size over the past year, to more than $100 billion in assets, after acquiring the fallen Signature Bank in an auction organized by federal regulators last spring.
Shares of New York Community Bancorp tumbled after it released an ugly earnings report that included unexpected losses on real estate loans for both office and apartment buildings. The shares have lost about half their value in the past week.
Shares of other lenders with commercial real estate portfolios have also fallen, a reminder that what affects one lender can affect others, as when fears of concentrated customer bases and low-interest portfolios crushed a group of lenders last spring. Here's what you need to know.
What's behind the latest banking worries?
The main shock in New York Community Bancorp's earnings report last week came from the admission that the value of its real estate loans had plummeted, prompting the country to cut its dividend and divert half a billion dollars to protect against future to lose. In particular, the bank identified a pair of loans — one related to an office complex and another for a cooperative housing building — that were responsible for as much as $185 million in losses.
Bank representatives, who did not respond to requests for comment, further stoked fears by deflecting analysts' questions about their expectations for future profits. The bank's shares fell nearly 40 percent after the earnings report and continued to lose ground, falling 11 percent on Monday and down more than 10 percent in early trading on Tuesday.
A host of smaller lenders, including community banks and private lenders, could also face losses related to commercial real estate loans, much of which was made before the post-pandemic shift to hybrid work put pressure on office landlords and damaged the value of put pressure on their real estate. buildings to fall. The rise in interest rates in recent years has also made it more expensive to refinance such loans.
Which other banks are in the spotlight?
According to Wolfe Research, M&T Bank is similar in size and has similar exposure to commercial real estate. In its latest earnings report, the bank reported an increase in the number of problematic real estate loans analysts said the exposure was 'controllable'.
The average regional banking stocks has lost 10 percent in the past week.
What about larger banks?
The largest banks in the United States, such as JPMorgan Chase and Citigroup, have been setting aside money for months to cover potential real estate losses. They are generally considered to be better able to weather a recession because of their diversified base of lending and savers. The share prices of the largest banks have held up better recently than those of smaller lenders.
What do regulators say?
Federal Reserve Chairman Jerome H. Powell said during a “60 Minutes” interview that aired on Sunday that he considered a real estate-led banking crisis unlikely. He said some smaller and regional banks were being “challenged” but the US central bank was working with them.
Mr. Powell described the situation as a “significant problem” that the Fed had been aware of for “a long time.”
Is there a risk of a bank run?
The banking crisis last spring was exacerbated by worried customers rushing to withdraw their money in one go, forcing several banks to halt withdrawals as they scrambled to retrieve cash. (Banks are only required to hold on to a fraction of their customers' deposits.) Thanks to the widespread use of mobile banking and electronic fund transfers, such a phenomenon can now occur faster than ever.
There is little evidence that New York Community Bancorp is anywhere near that precipice. The bank's executives said last week that deposits fell only 2 percent in the fourth quarter. They did not provide any further public updates, but Bank of America analysts cited “management feedback” on Friday that New York Community Bancorp was not experiencing unusual deposit activity.
Are there immediate reasons for bank customers to be concerned?
A falling share price does not immediately hinder the daily operations of a bank. New York Community Bancorp branches continue to operate normally and each customer is protected by a $250,000 government insurance policy.
Even for accounts above that level, regulators typically organize auctions in the event of a catastrophe (such as last spring) in which failed banks are taken over by healthier banks, with the aim of protecting ordinary account holders.