a bank publishes poor earnings or an “update” on its activities. His share price plummets. The name is on the front pages of newspapers. The bank’s bosses hold a conference call in which they appeal for calm. The share price drops some more. Anyone who has paid attention to the US banking sector over the past year will recognize these events. They ended in failure for Silicon Valley Bank (svb) in March and First Republic Bank (frb) in April.
At first glance it seems like the same script is playing out again. On January 31, New York Community Bancorp (NYCb) of Hicksville, New York, reported a quarterly loss. The stock promptly fell 46%. During a hastily arranged conference call with investors on February 7, Alessandro DiNello, the bank’s hastily appointed executive chairman, tried to allay fears. Shares slumped and fell another 10% when markets opened that morning.
Yet on the surface there are two major differences in these stories. The first and most important thing is that nycb does not appear to be on the brink of failure, nor is it easy to predict how it will fail in the coming weeks. Indeed, shares later rose on February 7. The second is that the problems indicate that a different kind of trouble has begun. When interest rates rise, their impact on things like bond prices is immediate. Its impact on borrowers’ ability to repay debt is longer lasting. svb And frB were both compromised by a combination of volatile deposits and their investments in low-interest securities or loans, the value of which collapsed when interest rates rose. nycb is struggling in large part because a large loan has gone bankrupt.
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To start with nycb‘s balance sheet. The bank, which holds $116 billion in assets, earned about $200 million in the third quarter of 2023. But in the last quarter, she had to set aside $552 million to cover real estate loans, resulting in a $252 million loss. Even before that, the country was already increasing capital levels. In 2023, it acquired assets and deposits from Signature Bank, which went bankrupt SVB last March. This pushed NYCb‘s assets exceed $100 billion, subjecting it to stricter regulation. Compared to its new twelve-figure competitors, NYCb is not a fortress. The bank’s common equity tier 1 ratio, a measure of capital based on the riskiness of its assets, fell to an unimpressive 9.1% from 9.6% in September. In an effort to hold more equity, the bank cut its dividend.
More than half of the bank’s value has now evaporated, leaving it with a market capitalization of $3 billion, less than a third of the book value of its equity. Analysts have lowered their profit expectations for the bank. On February 6, rating agency Moody’s lowered the rating NYCB to junk status, citing the bank’s exposure to commercial real estate and the recent departure of key audit and risk management personnel.
Grim things. But NYCB‘s deposits provide reassurance. More than two-thirds of the $83 billion deposited with the bank is insured, a much larger share than at the bank SVB And FRB before their failures, which should mean savers are less fickle. If they flee, the bank must remain where it is. Against uninsured deposits of $23 billion, nycb holds $17 billion in cash, $6 billion in securities and collateral that could be used to borrow $14 billion from the Federal Home Loan Banks (FHLB) system or the Federal Reserve’s discount window. In addition, NYCB could exchange $10 billion in “reciprocal deposits” with other banks, which could essentially reduce the share of deposits that are uninsured.
Run along
Some sources of liquidity are easier to tap than others, but the bank could have access to nearly three times as much money as it needs to pay out all its uninsured depositors. And for now, savers don’t seem to be going anywhere. Deposit levels have risen since the end of 2023, according to unaudited figures published by the bank on February 6. “We have seen virtually no outflow of deposits from our retail branches,” Mr. DiNello told investors on Feb. 7.
Anyway, NYCB‘s problems could cause broader unease. One reason for this is the dependence on the FHLB system. This unremarkable part of the US financial system consists of eleven government-sponsored banks, with total assets of $1.3 trillion. America’s “second-to-last resort” raises money in the capital markets, and does so cheaply, on the assumption that the government would cancel its borrowing. Then it lends FHLB members, who are also the dividend-receiving owners. End of March 2023 FHLB advances, a type of loan typically backed by mortgages, had nearly tripled since the year before. SVB alone had increased its borrowings to $15 billion by the end of 2022.
Because nycb holds more loans than deposits it has long relied on FHLB advances as a source of financing, especially before recent purchases brought in more savers. The end of 2023 is NYCB had borrowed $20 billion FHLB claims. This loan amounts to 17% of NYCB‘s assets, up from 12% at the end of September. The bank taps the FHLB system nine times faster than comparable colleagues.
Another reason for the broader unease is that this could be the first sign that a commercial real estate crisis is now damaging the banking system. Although total lending to office buildings is small as a percentage of small banks’ loan portfolios (about 5% of total assets), the decline in the value of office buildings has been steep.
Other companies are also having a hard time. Aozora, a Japanese lender that tried U.S. commercial real estate loans, reported losses related to its loans on Jan. 31. On February 7, Deutsche Pfandbriefbank, a German bank, announced that it had increased loss provisions for its commercial real estate loans. Given the post-pandemic decline in office use, more losses are likely. These are unlikely to endanger the wider banking system, but they could keep some banks on the headlines. ■
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