21st Century Business Herald reporter Wu Bin reports from Shanghai that there has been a resurgence of regional banking crises in the United States.
On February 6th Eastern Time, the stock price of New York Community Bank plummeted 22.22% to close at $4.200, a drop of about 60% from the closing price of $10.380 on January 30th before the financial report was released. On February 7th, Community Bank of New York appointed a new executive chairman and stated that it may reduce its risk exposure in the commercial real estate sector. After falling more than 10% during the trading session, the stock closed up 6.67% at $4.480, with the stock price still more than halving.
The house leak occurred during consecutive nights of rain, and the international rating agency Moody's also downgraded the rating of Commercial Bank of New York by two levels from Baa3 to Ba2, indicating a higher credit risk. Moody's stated that the core commercial real estate loans of New York Community Bank, as well as significant unexpected losses in New York office buildings and multi family homes, may erode investor confidence and face "financial, risk management, and governance challenges". If the situation worsens, there may be further downgrades.
In a high interest rate environment, the risk of commercial real estate in the United States has sharply increased, and the real estate industry is closely linked to the banking industry. When commercial real estate experiences losses, the bad debt rate of banks will rise, and the banking industry will also be caught up in the vortex.
During last year's regional banking crisis in the United States, the bankrupt signature banks were taken over by the New York Community Bank. How will the regional banking crisis in the United States come to an end this time?
Will the New York Community Bank go bankrupt?
At the beginning of 2024, a new wave of banking turmoil in the United States began with a poor financial report.
The financial report of New York Community Bank shows a huge loss of $252 million in the fourth quarter of last year, greatly exceeding the expectations of Wall Street analysts. Meanwhile, the New York Community Bank announced a reduction in dividends to 5 cents, compared to 17 cents in the previous quarter. Yingjie, Chief Overseas Market Analyst at Fangde Research Center, analyzed to 21st Century Business Herald reporters that the main reason for the loss was the significant increase in bad debt reserves of New York Community Bank, which surged from $62 million in the previous quarter to $550 million, nearly nine times the original amount.
At present, the market is already worried about whether New York Community Bank will go bankrupt in the future? Du Yang, a researcher at the Bank of China Research Institute, analyzed to 21st Century Business Herald reporters that the stock price of community banking in New York has dropped significantly, and market concerns about the performance of banks in the United States have spread. It is still unclear whether the New York Community Bank will fail, and several aspects need to be monitored.
One is whether New York Community Bank can effectively adjust its business strategy and improve its performance, which will have a key impact on its development trend. If risks can be effectively controlled and profitability can be improved, the likelihood of bankruptcy will be reduced.
Secondly, the significant decline in stock prices has impacted market confidence in the regional banking industry. If New York Community Bank can stabilize market sentiment and enhance investor confidence, it is of great significance to avoid further deterioration of risks.
The third is whether regulatory authorities can take timely and effective measures to stabilize the operation and market confidence of the regional banking industry, which will also affect the development trend of community banks in New York.
In fact, to some extent, the market's concerns are also somewhat excessive. According to Fu Yingjie's analysis, the underperformance of New York Community Bank is related to its previous acquisition of assets from Signature Bank, which has taken the bank's size to a new level, exceeding $100 billion and reaching a fourth level regulatory level in terms of balance sheet size. In order to meet the requirements of higher capital adequacy ratio, liquidity ratio, and risk management, New York Community Bank has increased its liquidity reserves, made large provisions, increased capital retention earnings, and increased the proportion of cash and high-quality bonds in total assets, which clearly affects current profits.
So, in Fu Yingjie's view, the poor financial report this time is likely due to a one-time cause. The management of New York Community Bank also stated in an emergency phone call that there are no major issues with the current operation and they are very confident in their assets. The recent thunderstorm at New York Community Bank was triggered by poor financial performance, which is not a systemic issue for the entire US banking system and cannot be compared to last year's events at Silicon Valley Bank and Credit Suisse. It is too early to talk about bankruptcy, as New York community banks have not yet reached the point of using the Federal Reserve's discount window.
Banking Crisis 2.0 or Difficulty to Present
Real estate developers and property owners often engage in financing business with banks. When the utilization and valuation of commercial real estate decrease, banks are also in the center of the storm, and the impact of commercial real estate problems on small and medium-sized banks and regional banks is more obvious. It should be noted that the tracker of financial data provider Trepp shows that $2.2 trillion in commercial real estate loans in the United States will expire by the end of 2027.
Du Yang analyzed to reporters that commercial real estate is still under early pressure and may have the following impacts and risks in the future: firstly, the demand for office buildings in commercial real estate has significantly decreased, leading to an increase in vacancy rates, which will weaken commercial real estate investment and to some extent affect economic growth. Secondly, small and medium-sized banks in the United States have a relatively high risk exposure to commercial real estate, which may lead to further deterioration of regional commercial bank crises. The third is that the default rate of commercial real estate loans in the United States has rebounded, which will lead to the instability of the banking system. If the above risk factors are combined, it may lead to the spread of panic in the financial market, thereby increasing the risk of the financial system.
In response to these risks, Du Yang believes that it is necessary to be vigilant and closely monitor the progress in three aspects. One is a policy adjustment by the Federal Reserve. Currently, the Federal Reserve's tightening monetary policy may exert further pressure on the commercial real estate market, and attention should be paid to the impact of its policy adjustments on the market. The second is the operational status of the enterprise. Pay attention to changes in corporate leverage, profitability, and capital expenditure plans to understand changes in demand in the commercial real estate market. The third is the dynamics of the financial market. Pay close attention to the development trends and potential financial risks of the financial market, especially the bond and stock markets.
On an official level, recently Federal Reserve Chairman Powell also mentioned regional banking pressure. He said that the Federal Reserve has studied the balance sheets of large banks and found that the problems in commercial real estate such as office buildings seem to be manageable. Some smaller regional banks have relatively concentrated risk exposure in these areas, and they will face challenges.
Powell also emphasized that the scale of the commercial real estate problem is significant and may take several years to solve, but today's problem is not like the subprime crisis. The Federal Reserve has been aware of this issue for quite some time and is working with these banks to ensure they have the appropriate resources and plans to deal with expected losses.
As the lagging effect of aggressive interest rate hikes that have not been seen in decades gradually becomes apparent, where will the regional banking crisis ultimately go?
Du Yang analyzed to reporters that overall, the trend of this round of regional banking crisis in the United States is still unclear. One is that some European and American banks are still exposed to risks. More than 180 small and medium-sized banks in the United States are still exposed to this crisis. If the benchmark interest rates in Europe and America remain high, market confidence will be difficult to recover, and some banks may face bankruptcy.
The second is the relaxation of regulatory requirements, and some small and medium-sized banks have aggressive business models, leading to increased risks. In 2018, the US government revised the Dodd Frank Act, raising the asset recognition criteria for systemically important banks from $50 billion to $250 billion, relaxing the capital adequacy and cash reserve requirements for small and medium-sized banks, and many small and medium-sized banks adopted a more risky business model.
The third is that the dilemma of commercial real estate poses risks and challenges to banks. Since the start of the Federal Reserve's interest rate hike cycle, the fundamentals of the US commercial real estate industry have deteriorated. The high interest rate level leads to a deterioration of the refinancing conditions for real estate enterprises, and the default risk is in an upward channel. Small and medium-sized banks are the main financing parties for American commercial real estate developers, which will further increase the operational risk of small and medium-sized banks.
Looking ahead, Fu Yingjie analyzed to reporters that although the New York community banking incident is unlikely to evolve into the banking industry crisis 2.0, the turbulence in the banking sector may intensify in the future. The Federal Reserve's relief program, the Bank Term Financing Program (BTFP), has announced its end, and the Overnight Reverse Repurchase Agreement (RRP) is also about to dry up. Liquidity may be tight in the future. Without the protection of BTFP, it is not ruled out that more banks will expose their own problems. But regulators and the Federal Reserve have upgraded their protection of the banking system after the banking crisis, and scrutiny has also become stricter. If there is a crisis at that time, I believe that the Federal Reserve can also take precautions by adjusting tools such as quantitative tightening in advance.