New York Community Bancorp panel at the New York Stock Exchange, January 31. BRENDAN MCDERMID (REUTERS)
Imagine two almost identical houses. One could fall, but it probably won’t. The other is built in such a way that it cannot collapse. Which would a rational person choose? The answer helps explain why the shock waves of last year’s US banking crisis – currently visible in the plummeting share price of New York Community Bancorp, NYCB – still reverberate through the sector.
On Tuesday, Moody’s downgraded NYCB’s debt rating to “junk.” It said it faced “multiple financial, risk management and governance challenges,” citing the bank’s recent unexpected losses on commercial real estate loans.
That’s never good for a bank. It’s true that NYCB doesn’t have a huge trading arm with counterparties that will take business away from it in the absence of a pristine rating, unlike Morgan Stanley, which in 2012 faced and ultimately evaded a three-notch downgrade. But the rating agency’s decision, triggered by last week’s real estate-related losses and the plan to shore up cash (by cutting the dividend) and capital, remains a serious problem, because it affects the confidence of which all banks depend on. Yesterday, NYCB shares had fallen 58% in just over a week, and its market value had dropped to $3.1 billion.
In its defense, NYCB has done many things to reassure investors and depositors. First, you have a plan to return to profitability over time. Second, it has renewed management by converting its president into an executive, effectively leaving aside the CEO, Thomas Cangemi. Most importantly, the NYCB has resolved questions about the safety of deposits too large to be insured by the Federal Deposit Insurance Corporation (FDIC). The bank could comfortably refund those deposits, the most likely to leak, even if customers withdrew them en masse.
There are two problems. First, crises of confidence sometimes defy facts and best efforts. Second, if it exhausted most of its liquid resources by reimbursing depositors, the bank would be unlikely to survive long. Interestingly, NYCB’s problems stem in part from regulators allowing it to grow too quickly, by purchasing loans from bankrupt Signature Bank last year. This caused indigestion that would not have affected too-big-to-fail giants like JP Morgan and Bank of America. The lesson is likely to be useful for future fiascos.
Meanwhile, fear of fear could push regulators to intervene more frequently and decisively. Unless the FDIC is willing to formally guarantee all deposits – something it has so far only done on an ad hoc basis – uninsured depositors will always have reason to seek refuge in truly indestructible financial houses whenever they sense bad weather. NYCB is now doing what it can to prevent this. He may succeed, but his powers are painfully finite.
The authors are Reuters Breakingviews columnists. The opinions are yours. The translation, by Carlos Gómez Abajo, is the responsibility of CincoDías
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2024-02-09 04:45:24
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