New York, March 18 (Xinhua Finance and Economics) - The regional banking crisis that erupted in March 2023 in the United States successively knocked down Silicon Valley Bank, Signature Bank, and First Republic Bank, but this crisis quickly fell silent after rapid regulatory action. However, one year later today, another regional bank in the United States, New York Community Bank, is in a storm, and the high interest rate pressures and commercial real estate difficulties reflected in the regional banking crisis in the United States have not yet been resolved.
The New York Community Bank, headquartered in the town of Hixville, about 50 kilometers east of Manhattan Island, New York City, released a performance report at the end of January this year. The bank's credit loss reserve for the fourth quarter of last year skyrocketed from $62 million in the previous quarter to $552 million, and decided to significantly reduce dividends per share to supplement capital and improve its balance sheet.
Market concerns immediately plunged New York Community Bank into crisis, with its stock price quickly dropping from above $10 per share to less than $5 per share, and its closing price on March 4th dropping even further to $2.73 per share.
As of the end of last year, the asset size of New York Community Bank was $114.1 billion, with loans and deposits of $83.6 billion and $81.5 billion, respectively. Its asset size far exceeds that of ordinary community banks, and it has crossed the threshold of $100 billion to become the fourth category of banks classified by regulatory authorities.
At present, the main trouble for New York Community Bank lies in its high proportion of commercial real estate business, especially the rental controlled apartment business in New York City. High interest rates bring book losses, and there are loopholes in the bank's internal control and risk management. After expanding its scale, it faces stricter regulatory requirements.
Research institutions estimate that rental controlled apartment related loans account for 22% of the total New York community bank loans. The government's control over the rise in rent has significantly reduced the value of related investments, and the continued downturn in commercial real estate in New York City since the outbreak of the COVID-19 epidemic has brought additional pressure.
At the end of 2022, New York Community Bank completed its acquisition of Flag Star Bank, headquartered in Michigan, which is an important residential mortgage service provider. Although this is an attempt to diversify business, it has made the New York community banking business more focused on the real estate industry.
It is worth noting that in March last year, New York Community Bank acquired some of the assets of Signature Bank from the Federal Reserve Insurance Company through Flag Star Bank. This acquisition ultimately crossed the $100 billion threshold for New York Community Bank assets and resulted in investment losses.
The New York Community Bank stated that it will withdraw an equal amount of credit loss reserves in the first quarter of this year due to a $20 million corporate bond issued by the signing bank.
The New York Community Bank announced at the end of February that it had postponed the release of its 2023 financial report and stated that management had identified "substantial weaknesses" in internal controls related to bank loan approval. This further raises market concerns about the bank's corporate governance, supervision, and risk management.
On the one hand, New York Community Bank continues to reduce per share dividends and raise funds by introducing investors and selling consumer and commercial real estate loans. On the other hand, it has made significant adjustments to its management in an attempt to turn the tide. In addition, the bank has also announced a stock merger plan to increase its attractiveness to investors.
Led by former US Treasury Secretary Steven Mnuchin, multiple private equity funds announced on the 6th a joint $1.05 billion equity investment in New York Community Bank. Mnuchin and former Director of the Office of the Comptroller of the Currency Joseph Odin will hold important positions at the New York Community Bank.
After news spread in the market that New York Community Bank needed external capital injection, its stock price experienced a 47.2% drop on March 6th, hitting a multi-year low of $1.7 per share during trading, and trading on the stock was temporarily suspended. The news of capital injection confirmation subsequently stimulated the stock price of New York Community Bank to rebound significantly on the same day, closing up 7.45%.
After receiving funding from external investors, market confidence in New York Community Bank has been restored. However, the sale of high-quality consumer loans by community banks in New York will weaken their overall asset quality and profitability. Commercial real estate in New York may face a prolonged downturn, and the negative effects of rent controlled apartments are difficult to change in the short term. It remains to be seen whether this bank, ranked 28th in the United States, can escape the crisis.
Given the solid performance of US economic data and the prominent stickiness of inflation, the Federal Reserve may need to wait longer before initiating interest rate cuts. The real estate industry, which is struggling with high interest rates, will still pose operational pressure on regional banks in the US, which have a relatively high proportion of real estate business.
Analysts believe that even if the Federal Reserve starts cutting interest rates, it will only alleviate the pressure on the real estate industry to some extent, but it cannot solve the structural and trend bearish situation in the commercial real estate sector.