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About a year ago, the collapse of Silicon Valley Bank triggered a wave of regional bank failures in the United States. Now, the US financial market is facing another storm.

On January 31, 2024 (Wednesday), before the opening of the US stock market, New York Community Bank (NYCB) released its financial report, showing that the bank unexpectedly lost $260 million in the fourth quarter of 2023, in sharp contrast to the $206 million profit expected by analysts.

After the release of the financial report, NYCB's stock price plummeted. It opened 42.6% lower and fell more than 46% at the beginning of the trading day. It closed 37.7% lower on the day, the largest intraday and closing decline since the bank went public in November 1993. It far exceeded the bank's maximum decline during the global financial crisis in 2008, and wiped out all the gains since the Silicon Valley Bank crisis last year. This has caused some concerns in the market.

On Thursday, February 1, NYCB continued to fall by 11.13%, and then rebounded by 5.04% on Friday, February 2. It fell by 42.15% in the three trading days from Wednesday to Friday.

What is more noteworthy is that on the same day that NYCB's financial report hit market confidence, the Federal Open Market Committee (FOMC) of the Federal Reserve decided for the fourth time to keep interest rates unchanged at a high level, and Fed Chairman Powell dashed market expectations for a rate cut in March. In addition, the FOMC's latest policy statement quietly removed the statement that the banking system is "strong and resilient" and that tightening credit conditions could drag on the economy, which undoubtedly added to the market's anxiety.

Is this the "root cause" of a deeper problem? Is a "Silicon Valley Bank 2.0" crisis coming?

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Rick Roberts, a former credit risk supervisor at the Fed, told the National Business Daily that "In a nutshell, NYCB's situation is unique to them. It does not point any increased concerns with the broader group of regional banks, although the group as a whole has declined in value a bit over recent days due to some confusion about NYCB losses and what it meant for the regionals.."

NYBC's provision for loan losses surged to $552 million, more than 10 times analysts' estimates

On January 31, Eastern Time, NYCB announced its fourth-quarter 2023 financial report. The data showed that the bank lost $260 million, far from the analysts’ previous expectation of a profit of $206 million, while the bank made a profit of $172 million in the same period in 2022. During the reporting period, the loss per share was $0.36, turning from profit to loss compared with the same period last year.

At the same time, NYCB announced a dividend cut of 5 cents, far below the previous analysts’ forecast of keeping the dividend at 17 cents, mainly to meet the regulatory requirements for the fourth-class banks with asset size of $100 billion to $250 billion. According to Reuters, NYCB acquired part of the assets of the collapsed Signature Bank last year, and added the acquisition of Flagstar Bank in 2022, NYCB’s asset size reached $116.3 billion, becoming one of the 30 largest banks in the United States by asset size, according to the regulatory rules, it needs to reserve more capital and loss provisions.

The financial report showed that during the reporting period, NYCB’s loan loss provision was $552 million, more than 10 times higher than the analysts’ forecast of $45 million, and far exceeding the $62 million in the previous quarter. Reuters reported that this indicated a deterioration in its credit condition.

The rating agency Moody’s said it had placed all long-term and short-term ratings and assessments of NYCB and its subsidiary Flagstar Bank on the watch list for possible downgrade. Brokers also adjusted their ratings on NYCB, for example, Raymond James analyst Steve Moss downgraded NYCB from “strong buy” to “market perform”.

NYCB’s plunge also dragged down the US regional bank stocks. On Wednesday, the KBW Regional Bank Index and the KBW Nasdaq Regional Banking Index (KRX) both fell by about 6%, setting the biggest one-day drop since the collapse of Silicon Valley Bank on March 13, 2023. Component stocks, Valley National Bancorp fell by about 7%, and Citizens Financial Group fell by more than 4%.

The capital market was also caught off guard. NBD noticed that Trade Alert data showed that the option traders supported by the SPDR S&P Regional Bank Exchange Traded Fund had been bullish on the US regional banks, especially in the short term. But on the day of NYCB’s plunge, as investors expected a gloomier outlook, the trading speed of these options was four times the usual, and the put options of this type of option were three times as many as the call options on that day.

Former Fed official: No wider regional bank crisis brewing

The Wall Street Journal reported that New York Community Bank’s earnings “bomb” reminded some investors of the US banking crisis that occurred in early 2023. Silicon Valley Bank and First Republic Bank both closed within weeks, triggering a crisis of confidence among depositors and investors in regional banks.

More notably, on the same day as NYCB’s earnings release, the FOMC kept interest rates unchanged at a high level for the fourth consecutive time, and Fed Chairman Powell shattered the market’s expectation that the FOMC would start cutting rates at its March meeting, further aggravating investor anxiety. Reuters reported that the high interest rates aimed at curbing inflation dragged down the loan profits of US regional banks and the value of their securities holdings.

In addition, NBD noticed that the FOMC’s latest policy statement deleted the phrases “robust and resilient” for the banking system and that tighter credit conditions could weigh on the economy.

Rick Roberts, former credit risk director of the Fed, told NBD that certainly banks will face losses because of higher rates but these have already been provisioned.  NYCB is a special case because they are in a new Fed "size category" ($100B+, in part because of acquisition if Republic) and are forced to provision more -- they are just now catching up so that their loan loss provisions are similar to other banks in their size category.

Speaking of NYCB’s stock price in recent days, Rick Roberts said, “Due to investor confusion over NYCB’s huge loss and its impact on other regional banks, the sector’s overall market value has declined in recent days.”

A report to clients by Yuri Seliger, a US bank strategist, also wrote that a series of earnings reports released by the US six major banks and regional banks recently showed that their financial situation was improving, “This indicates that NYCB’s unexpected situation may be a singular event, not an indicator of a broader problem.”

Other analysts also said that NYCB’s problem was mainly caused by its balance sheet, and bank stocks as a whole did not face as much pressure as they did in March last year.

Beware commercial real estate risks

Despite the fact that NYCB’s performance loss was due to excess loss provisions, the risks faced by regional banks in the US in a high-interest-rate environment from the commercial real estate industry should not be underestimated.

Bloomberg reported that NYCB recorded its biggest one-day drop in more than 30 years of listing on Wednesday, because investors were worried that NYCB might be a harbinger of a collapse in US commercial real estate.

The report showed that as of the end of the third quarter of 2023, the US banking industry held about $2.7 trillion in commercial real estate debt. And the decline in the value of commercial real estate could increase the solvency risk of hundreds of US banks. Data from real estate analysis firm Green Street showed that since the Federal Reserve began raising interest rates to cope with inflation, the value of US commercial real estate had fallen by 22%.

A report released by JPMorgan Chase in April last year showed that commercial real estate loans accounted for 28.7% of small bank assets, while the proportion for large banks was only 6.5%. This means that small banks have a greater exposure to the risk of commercial real estate.

“Regional banks do face the real pressure of the upcoming maturity of commercial real estate loans, which need to be refinanced and then written down, because the value of the collateral is now lower. However, most have already booked the loan loss reserves already for this. It's a question of whether they were liberal enough in there booking if anticipated CRE losses .” Rick Roberts explained to the reporter of the Daily Economic News.

Bloomberg cited data from data provider Trepp, saying that by the end of 2025, major US banks will face about $560 billion in commercial real estate loans due, accounting for more than half of the total amount of real estate debt due in the same period.

Kashif Ansari, co-founder and group CEO of Juwai IQI, a global real estate technology company headquartered in Kuala Lumpur, told NBD that the current situation facing commercial real estate is unlikely to trigger a banking crisis similar to that of 2008.

Ansari said that about one-quarter of the commercial real estate loans of small banks in the United States are used for office buildings. Even if half of the office building owners return the property to the bank, the bank may still be able to recover some of the funds by selling the assets at a depreciaiton. Compared to residential mortgage loans, the standards for commercial real estate loans are also more stringent. Therefore, the losses of these small banks on office buildings will not be enough to hurt the bank's assets.