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It’s been exactly one year since the collapse of Silicon Valley Bank, and many are wondering if similar weaknesses that caused a regional crisis last March are still lingering. The most prominent of those worries have centered around New York Community Bancorp (NYSE:NYCB), which scooped up the assets of Signature Bank, another commercial lender that failed during the crisis in 2023. The last time around, the FDIC stepped in to facilitate the sales of the failed banks and protect their insured deposits, but things would definitely be easier to handle ahead of time, especially if it meant trouble for the wider industry.
Snapshot: It’s important to note that banks can fail for different reasons, and the appropriate rules and guidelines needed to combat certain failures might not necessarily do the job elsewhere. SVB didn’t fail because it had bad loans, but rather because the supervision that was supposed to be in place didn’t effectively address maturity mismatches and diversification. Elsewhere, New York Community Bank set off alarm bells in January with a surprise quarterly loss and provisions for credit losses, and while an investor group led by former Treasury Secretary Steven Mnuchin recently stepped in to offer a $1B lifeline, concerns remain over its ties to commercial real estate. According to the St. Louis Fed, two-thirds of CRE loans are held by community or regional banks, meaning if things go sour, the industry can fall under immense pressure.
“The high concentration of CRE exposures represents a serious risk to small and large banks amid economic uncertainty and higher interest rates, potentially declining property values, and asset quality deterioration,” the IMF warned in a global financial stability note last week. “In the fourth quarter of 2023, a subset of banks remained with exceptionally high CRE concentration for which losses could compromise their safety and soundness… The turmoil also serves as a stark reminder of the impact that rapidly rising interest rates can have by interacting with underlying financial vulnerabilities.”
Outlook: Regulators are tightening their scrutiny and attempting to stave off risk in the banking sector with things like “Basel III Endgame” and new rules that cover short-term liquidity and capital requirements. The question is if these will effectively target CRE risk or, on the flipside, if the whole matter with its dangers to the financial system is over-sensationalized. Remember the deep recession warnings of the past two years that never materialized despite the doom-and-gloom predictions from industry leaders like JPMorgan CEO Jamie Dimon and Amazon founder Jeff Bezos?
Related: Axos Financial (AX), Bank OZK (OZK), Columbia Banking System (CLB), Comerica (CMA), Fifth Third Bancorp (FITB), KeyCorp (KEY), Pacific Premier (PPBI), Regions Financial (RF), WaFd (WAFD) Western Alliance (WAL), Valley National (VLY) and Zions Bancorporation (ZION).