New York Community Bancorp downgrade stokes fears of regional bank failures

New York Community Bancorp (NYCB) stock fell Wednesday morning after Moody’s Investors Service late downgraded the company’s rating to investment grade, the lowest possible rating. .

NYCB’s stock price fell nearly 14% early Wednesday following the downgrade, which Moody’s blamed on the bank’s “multifaceted financial, risk management and governance challenges.”

The bank’s stock had recovered slightly from a 2.5% drop on the day as of midday, but has fallen nearly 40% over the past week.

“From a financial strategy perspective, the bank aims to strengthen its capital base, but it has just suffered an unexpected loss in commercial real estate (CRE), which is a key focus for the bank,” Moody’s said. .

The bank’s stock price has been on a downward trend since last week, when it reported a fourth-quarter net loss of $252 million. In the third quarter, NYCB posted a net income of $207 million.

Local bank stocks have fallen sharply following NYCB’s losses over the past week. The KBW Nasdaq Regional Bank Index, which tracks the performance of regional banks, fell 12% last week.

Ahead of Tuesday’s downgrade, Rep. Ritchie Torres of New York pressed Treasury Secretary Janet Yellen during a House financial hearing about “signs of volatility” at the bank.

“New York Community Bank is New York City’s largest multifamily portfolio lender, with more than $37 billion in multifamily loans,” Torres said. “In contrast, Signature’s multifamily lending was much smaller at $15 billion.”

Torres was referring to Signature Bank, whose assets were purchased by NYCB after it collapsed in March due to a series of problems at local banks.

“The New York Community Bank crisis will not only destabilize the banking system, it will destabilize the nation’s largest multifamily housing market,” he added.

Yellen declined to comment specifically on NYCB, but said the Financial Stability Oversight Council has “long recognized that commercial real estate can create “financial stability risks and losses for the banking system.” ” he emphasized.

Yellen noted that the commercial real estate sector faces multiple stressors, with loan deadlines looming amid a rising interest rate environment and changing office work patterns due to the pandemic.

“While some institutions may be quite stressed by this issue, I believe this issue is manageable,” she added.

Federal Reserve Chairman Jerome Powell similarly suggested in a “60 Minutes” interview on Sunday that commercial real estate problems are “manageable.”

“I looked at the balance sheets of the big banks and it looks like it’s a manageable problem,” Powell said. “There are several smaller regional banks that offer focused exposure to these difficult areas.”

“We are working with them,” he added. “This is something we have known for a long time and we are working with them to ensure they have the resources and plans to weather the expected losses. ”

The Fed chairman said some banks, likely smaller ones, “will have to close down or merge and disappear.” But he stressed that another real estate-driven banking crisis is unlikely.

“There does not appear to be any predisposition to a crisis of the kind we have seen from time to time in the past, such as the global financial crisis,” Powell said.

“We have to be careful about what we declare, especially about the future. Things have taken us by surprise,” he added. “But no, I think it’s a manageable problem when it comes to this. I think we’re doing a lot to manage it.”