New York Community Bancorp downgrade stokes fears of regional bank failures

New York Community Bancorp (NYCB) stock fell Wednesday morning after Moody's Investor Service belatedly lowered the bank's rating to its lowest possible investment grade.

Shares of NYCB fell nearly 14 percent early Wednesday following the downgrade, which Moody's attributed to the “multifaceted financial, risk management and governance challenges” facing the bank.

By midday, the bank's shares had recovered slightly, with a loss of 2.5 percent for the day, but had fallen nearly 40 percent over the past week.

“In terms of financial strategy, the bank is looking to strengthen its capital but has just suffered an unexpected loss in commercial real estate (CRE), which represents a significant concentration for the bank,” noted Moody's.

The bank's shares have been on a downward trajectory since last week's earnings release, which reported a fourth-quarter net loss of $252 million. In the third quarter, NYCB reported net income of $207 million.

NYCB's losses over the past week have sparked a selloff in regional bank stocks. The KBW Nasdaq Regional Banking Index, which tracks the performance of regional banks, fell 12 percent last week.

Before Tuesday's downgrade, Rep. Ritchie Torres (D-N.Y.) pressed Treasury Secretary Janet Yellen during a House Financial Services hearing about “signs of volatility” at the bank.

“New York Community Bank is the largest multifamily portfolio lender in New York, with more than $37 billion in multifamily loans,” Torres said. “In contrast, Signature had much less: $15 billion in multifamily loans.”

Torres was referring to Signature Bank, whose assets were purchased by NYCB after a bankruptcy during a wave of trouble for regional banks in March.

“A crisis at New York Community Bank would destabilize not only the banking system, but also the largest multifamily real estate market in the United States,” he added.

Yellen declined to comment specifically on NYCB, but noted that the Financial Stability Oversight Board has been “long aware” that commercial real estate could create “financial stability risk or losses in the banking system.”

The commercial real estate sector is facing multiple stressors as loans mature amid higher interest rates and a change in office work habits due to the pandemic, a Yellen noted.

“I think it's manageable, although some institutions may be very stressed by this problem,” she added.

Federal Reserve Chairman Jerome Powell also suggested in his “60 Minutes” interview Sunday that commercial real estate's problems are “manageable.”

“We looked at the balance sheets of the big banks and this appears to be a manageable problem,” Powell said. “Some smaller and regional banks that concentrate their exposures in these areas are facing difficulties. »

“We are working with them,” he added. “This is something we have been aware of for a long time, and we are working with them to ensure they have the resources and a plan to overcome the expected losses.”

The Fed chairman said some banks, likely smaller banks, “will have to be closed or merged.” However, he stressed that a new banking crisis linked to real estate seems unlikely.

“It doesn't seem to have the characteristics of the kind of crises that we've sometimes seen in the past, for example with the global financial crisis,” Powell said.

“We must be careful when we make proclamations, especially about the future. Things surprised us a lot,” he added. “But no, about that, I think it’s a manageable problem. I think we're doing a lot to manage that.

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