New York Community Bancorp downgrade stokes fears of regional bank failures

New York Community Bancorp (NYCB) stock tumbled Wednesday morning after Moody’s Investor Service downgraded the bank to its lowest possible investment grade rating.

NYCB’s shares fell nearly 14 percent early Wednesday following the downgrade, which Moody’s attributed to the “multi-faceted financial, risk-management and governance challenges facing” the bank.

As of midday, the bank’s shares had recovered slightly to a loss of 2.5 percent on the day, but they have fallen nearly 40 percent over the past week.

“In terms of financial strategy, the bank is seeking to build its capital but just took an unanticipated loss on commercial real estate which is a significant concentration for the bank,” Moody’s noted.

The bank’s stock has been on a downward trajectory since last week’s earnings report, which showed a net loss of $252 million in the fourth quarter. In the third quarter, NYCB had posted a net income of $207 million.

NYCB’s losses over the past week have triggered a wider sell-off in regional bank stocks. The KBW Nasdaq Regional Banking Index, which tracks the performance of regional banks, has fallen 12 percent in the last week.

Prior to the downgrade on Tuesday, Rep. Ritchie Torres (D-N.Y.) pressed Treasury Secretary Janet Yellen at 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 City, with more than $37 billion in multifamily loans,” Torres said. “By way of contrast, Signature had far less — $15 billion in multifamily loans.” 

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

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

Yellen declined to comment on NYCB specifically but emphasized that the Financial Stability Oversight Council has “long been 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 come due amid a higher interest rate environment and a shift in office work patterns due to the pandemic, Yellen noted.

“I believe it’s manageable, although there may be some institutions that are quite stressed by this problem,” she added.

Federal Reserve Chair Jerome Powell similarly suggested in his “60 Minutes” interview Sunday that the problems in commercial real estate are “manageable.”

“We looked at the larger banks’ balance sheets, and it appears to be a manageable problem,” Powell said. “There’s some smaller and regional banks that have concentrated exposures in these areas that are challenged.”

“We’re working with them,” he added. “This is something we’ve been aware of for a long time, and we’re working with them to make sure that they have the resources and a plan to work their way through the expected losses.”

The Fed chair said some banks, likely smaller banks, will “have to be closed or merged out of existence.” However, he emphasized that another real estate-led banking crisis appears unlikely.  

“It doesn’t appear to have the makings of the kind of crisis things that we’ve seen sometimes in the past, for example, with the global financial crisis,” Powell said.

“We need to be careful about making proclamations, particularly about the future. Things have surprised us a lot,” he added. “But no, on this, I do think it’s a manageable problem. I think we’re doing a lot to manage it.”