Client Question: Another Banking Crisis?

March 7, 2024

A year certainly goes quickly. It’s hard to believe that it was almost a year ago that Silicon Valley Bank (SVB) collapsed and sparked a “mini” banking crisis.

This week, another bank was in the news with related solvency concerns – New York Community Bancorp (“NYCB”). A client asked what had occurred at this bank and what the likely contagion risk was (if any) to markets more broadly.

NYCB has been under some level of duress since January when it revealed troubles lurking in its commercial real estate lending business. The bank reported added loan loss reserves (pushing it into a loss position), cut its dividend, and was further marred by a material weakness letter from its auditor concerning its process for assessing and monitoring loans. All these events triggered credit downgrades and ultimately led to the bank pursuing additional funding to shore up its balance sheet.

News of the fundraise leaked to the media this past week and shares of NYCB fell 40% before rebounding slightly after news of a funding syndicate (raising over $1 billion) was confirmed.

At the end of 2023, NYCB had assets over $100 billion and was the 28th largest bank in the US – so certainly not inconsequential to the system. However, it does not seem (at least at this time) that the events at this bank will not spread across the industry (and markets) as last year’s events at SVB did.

If you recall, the events at SVB were caused by the sharp rise in interest rates (leading to losses on the bank’s investment portfolio that had to be realized when deposit outflows picked up). This was an industry-wide issue as many banks held longer-date treasury securities that fell in value as rates rose. As the issue of a year ago related to interest rates (which many believed at the time would keep rising and thereby causing more damage), the market as a whole was impacted, albeit briefly.

NYCB’s issues are far more specific, namely exposure to a subsector of New York real estate (rent stabilized buildings and some internal control/management issues with properly reserving for future losses. Further, its deposit base has held steady, helping the institution avoid the “run on the bank” that SVB endured. And management has acted quickly, putting new management members in place and securing the $1 billion in funding. For now, it appears that NYCB’s issues are contained – both within the bank itself and market wide.

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