NYCB Explainer: Are current banking sector woes justified?

Over the last 24 hours, the stock of New York Community Bank (NYCB) has declined as a result of Moody’s downgrading the bank’s credit rating to junk status. After Signature Bank failed less than a year ago, NYCB acquired its assets and placed them under a new regulatory framework.

NYCB stated that it had lost $252 million in the most recent quarter due to losses in commercial real estate. Last year, NYCB assumed just under $40 billion in assets when it bought Signature Bank.

Experts have cautioned that customers shouldn’t get carried away with development since they are unaware of the true nature of this bank sector case.

Real estate loans, the main business of the bank and a significant portion of the acquired business, are soured. At the end of the previous year, New York City had a record-high office vacancy rate of 17%.

Since these loans are typically taken up by other regional banks, the commercial real estate market could pose a threat to them. The inability of small regional banks to obtain the necessary diversification on the asset side of the business model highlights the fundamental shortcomings of the model.

These elements don’t indicate with certainty that NYCB will collapse. Rather, they should be more concerned about whether or not there is enough liquidity and if they would lose a significant amount of deposits. During a call with investors this morning, NYCB reported “virtually no deposit outflow.”

During a House Financial Services hearing, Democrat Representative Ritchie Torres questioned Treasury Secretary Janet Yellen regarding “signs of volatility” within the bank. He underlined that the biggest multifamily housing market in the country and the banking system would both become unstable in the event of a crisis at NYCB.

Additionally, Jerome Powell made the claim that the issues facing commercial real estate are “manageable,” noting that certain smaller and regional banks have a concentrated amount of risk in these difficult sectors.

A substantial decline in real estate loans caused New York Community Bancorp to cut its dividend and make a half-billion-dollar investment to hedge against further losses.

The bank determined that losses of up to $185 million could have been attributed to two loans: one for a cooperative residential block and the other for an office development.

Over the previous week, the average regional bank’s stock has dropped by more than 10%. Bigger banks, such as Citigroup and JPMorgan Chase, have been putting money aside to cushion against real estate losses. Chase has also stated that it will open 500 locations over the next three years.

Powell expressed his opinion that a banking crisis driven by real estate was improbable in an interview with “60 Minutes” that aired on Sunday. Additionally, he stated that although some smaller and regional banks were “challenged,” the US Federal Reserve was assisting them.

Treasury Secretary Janet Yellen stated that she was keeping an eye on the present strains on the banking industry, but she refrained from commenting particularly on New York Community Bancorp.