With NYCB Downgraded, Will There Be A Regional Banking Crisis in 2024?
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Update as of Feb. 8, 2024:
On Feb. 6, Moody’s, one of the top credit rating agencies, downgraded New York Community Bancorp (NYCB) to junk status. Fitch, another credit rating agency, also downgraded the bank’s rating last week. NYCB's shares fell nearly 60% over the past week.
Moody's wrote in its release that the downgrade “reflects multi-faceted financial, risk-management and governance challenges facing NYCB.”
In March 2023, NYCB acquired $38 billion in Signature Bridge Bank’s assets after the latter collapsed suddenly. That acquisition was a major expansion for the regional bank, which then reportedly struggled to meet regulatory requirements. NYCB reported fourth-quarter losses last week.
Moody’s noted in its downgrade that NYCB “took an unanticipated loss on commercial real estate (CRE), which is a significant concentration for the bank.” The credit rating agency further noted that a loss of depositor confidence could put the bank’s funding and liquidity in jeopardy.
In response to the credit downgrade, NYCB issued a press release on Feb. 6 to detail its “deposit stability” (72% of all deposits are insured) and “ample liquidity” (it’s liquidity is$37.3 billion, which the bank says is more than enough to cover uninsured deposits). The bank additionally named a new executive chairman in an effort to “improve all aspects of the Bank’s operations,” according to a statement released by the bank.
The news spurred a broader sell-off of regional bank stocks and stoked fears of further ripple effects in the regional banking industry. The KBW Regional Bank exchange traded fund, an index that tracks regional banks, is down 12% since the start of the year.
Previous updates: • Aug. 22, 2023: This week S&P Global Ratings, one of the top credit rating agencies, cut the ratings of five regional U.S. banks: Associated Banc Corp, Comerica Inc, KeyCorp, UMB Financial Corp. and Valley National Bancorp.
• Aug. 9, 2023: Moody’s cut the ratings of 10 regional banks this week and warned some of the biggest lenders in the U.S. that they could be next.
Multiple lenders are now on notice for a potential downgrade including Bank of New York Mellon; Cullen/Frost Bankers; Northern Trust; State Street; Truist Financial; and U.S. Bancorp. [Editor’s note: Bank of New York Mellon has changed its name to BNY as of June 11, 2024.]
The credit agency also assigned a negative outlook to 11 additional banks including Capital One, Citizens Financial and PNC Financial Services Group.
• July 26, 2023: PacWest Bancorp, a midsize regional lender based in Los Angeles, is set to merge with Banc of California, Inc., the two banks announced on July 25. On May 3, PacWest said in a statement that it was planning to sell its portfolio and was evaluating potential partners and investors. The combined bank will be headquartered in Los Angeles under the Banc of California name and will now have a total of 70 branches. The new company is expected to have $36.1 billion in assets, $25.3 billion in total loans and $30.5 billion in total deposits.
The story below was originally published March 31, 2023 and has since been updated multiple times.
In spring 2023, banking failures in the U.S. and Europe prompted government interventions in an effort to contain the crisis. The collapses brought discussion about regulating the banking sector back into the spotlight in a way we haven’t seen since the Great Recession. The phrase “too big to fail” has made its way into the zeitgeist once again.
On March 21, U.S. Treasury Secretary Janet Yellen said in a statement to the American Bankers Association, “The situation is stabilizing. And the U.S. banking system remains sound.”
Some economic wonks and lawmakers are now arguing for reform including an increase to the $250,000 Federal Deposit Insurance Corp. insurance cap. And midsize banks are asking the FDIC to insure all deposits for at least two years, according to reports. But House Republicans are calling for an end to banking bailouts and said they oppose “any universal guarantee on bank deposits over the current limit.”
However, on March 22, Yellen told senators, “I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits.”
Meanwhile, the Federal Reserve has been on a mission to tame inflation. The Fed raised the federal funds rate 10 times in a row starting in March 2022. After pausing its hikes in June, the Fed raised rates in July to 5.25%-5.5%.
To get you up to speed on the 2023 banking crisis, here are answers to popular questions about last year's events.
