Banking Industry Faces Challenges as New York Community Bank Discloses ‘Material Weakness’
It’s been exactly one year since the collapse of Silicon Valley Bank (SVB), which marked the start of a series of subsequent bank failures. While the banking industry as a whole appears to be in a better position now, it still faces challenges. One of the primary concerns is the impact of commercial real estate loans that have soured due to high office vacancy rates caused by remote working. This has led to many office landlords slashing rent or selling properties at a loss, potentially resulting in significant missed loan payments.
Federal Reserve Chair Jerome Powell warned senators that there will be bank failures due to these circumstances. The recent news from New York Community Bank (NYCB) only adds to these concerns. NYCB disclosed a “material weakness” in its lending operations, which was attributed to ineffective oversight, risk assessment, and monitoring activities. This revelation, coupled with reports of the bank searching for much-needed investment, caused NYCB’s stock to plummet by over 40%.
However, despite the similarities to last year’s banking crisis, it is unlikely that this is the beginning of a new wave of failures. When SVB was shuttered by regulators on March 10, 2023, other regional bank stocks also saw significant declines. In contrast, when NYCB’s stock fell, many regional bank stocks remained relatively stable or even showed positive growth.
Bruce Van Saun, the head of Citizens Financial Group, the 14th largest bank in the US, believes that last year’s bank failures were idiosyncratic rather than indicative of a systemic issue. He attributes the failures to rapid growth, taking in a high percentage of uninsured deposits, having narrow customer bases, and borrowing short while investing long. These banks also lacked the regulatory oversight and muscle that larger banks possess.
When asked about who deserves more blame for the failures, Van Saun believes it is a joint failure between the management teams of the failed banks and financial supervisors. While the board and management should have avoided bad strategic decisions, the regulatory process should have identified and addressed shortcomings.
Citizens Financial Group itself faced pressure on its stock during last year’s crisis, despite not experiencing the same problems as the failed banks. Van Saun emphasizes the importance of maintaining deposits and liquidity during such times and being proactive in addressing customer concerns. Citizens saw high demand from customers of SVB and Signature Bank, leading to extended hours and additional staff to meet the increased demand.
The past year has also prompted changes in Citizens’ business model. The bank recognizes that deposits will cost more, making it crucial to carefully consider where those deposits are being lent. They have shifted away from certain non-strategic activities, such as indirect auto loans and flow agreements, to solidify their deposit base.
Regarding NYCB’s situation, Van Saun believes that the bank’s chances of failure have been reduced with the injection of $1 billion in investment and a management overhaul. The appointment of Joseph Otting as CEO brings instant credibility to NYCB due to his previous experience as the comptroller of the currency and CEO of OneWest Bank.
When it comes to commercial real estate, Van Saun acknowledges the challenges but highlights the importance of looking beneath the surface. While office spaces may be struggling, other sectors like industrial and multi-family homes are generally fine. Citizens Financial Group has carefully assessed its portfolio and set aside reserves to mitigate potential losses. They are working on a loan-by-loan basis with senior staff to manage the process effectively.
In conclusion, while the banking industry has made progress since last year’s crisis, challenges remain. The impact of remote working on commercial real estate loans poses a significant risk, and there may still be bank failures in the future. However, banks like Citizens Financial Group have learned from past experiences and are taking proactive measures to navigate these challenges and protect their interests.
