Former Treasury Secretary Steve Mnuchin is making a big bet that regulators don't want NYCB to be the next SVB.
He and a group of investors closed their $1 billion deal to inject new capital into troubled lender New York Community Bancorp (NYCB), just days before the one-year anniversary of the government's seizure of California lender Silicon Valley Bank (SVB). ). The failure on March 10, 2023 caused widespread panic in the banking system.
Mnuchin was apparently trying to make sure this was OK with regulators. He told CNBC that he had “extensive” discussions with the Federal Reserve and the Office of the Comptroller of the Currency and that they supported the cash injection.
Steve Mnuchin knows his way around Washington, having served as Treasury secretary during the Trump administration. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)
There's probably a reason for that: What regulators have learned from the upheaval a year ago is that they want to fix problems at individual banks before it's too late – and certainly not before a surprise seizure triggers excessive panic in financial markets .
“We weren’t fast enough, we weren’t effective enough,” Fed Chairman Jay Powell told Senate lawmakers on Thursday, citing the Fed’s oversight of SVB. The lesson was that “earlier and more effective interventions” need to be made in the future.
Not only is a private solution usually preferable to a public solution for a struggling lender, it is also cheaper for the banking system as a whole.
“From the FDIC's perspective, having an open banking solution at all times that doesn't involve the deposit insurance fund is a good thing,” Mitchell Glassman, an advisor at Secura/Issac, told Yahoo Finance.
No one “wants to take on that burden if they can avoid it,” added John Popeo, a financial adviser and former FDIC attorney.
Silicon Valley Bank was seized on March 10, 2023, causing panic in the banking system. (Brittany Hosea-Small/REUTERS/File Photo) (Reuters/Reuters)
Major banks paid billions in the fourth quarter to cover losses suffered by the Federal Deposit Insurance Corporation from the bankruptcies of Silicon Valley Bank and New York lender Signature Bank, which was seized on March 13.
The banks will probably have to pay billions more. The FDIC this week increased its total loss figure since the March 2023 outages by about $4 billion to $20.4 billion.
The story goes on
The concerns plaguing banks in 2024 have to do with commercial real estate and whether lenders will have enough reserves to handle the losses expected from half-empty office buildings and multifamily apartment complexes that are no longer as much are worth as before the pandemic.
During his testimony to lawmakers last week, Powell said the Fed is in contact with banks to ensure they have enough liquidity and capital to absorb any losses from commercial real estate exposures.
“We try to stay ahead from bank to bank and so far we have succeeded,” he said.
“I believe this is a manageable problem,” he added. “If that changes, I will say so.”
FDIC Chairman Martin Gruenberg told reporters Thursday that commercial real estate continues to pose a “downside risk to the industry and that is certainly a high priority for the FDIC and the other banks in terms of our regulatory work.”
The irony of NYCB's predicament in 2024 is that a year ago it played the role of savior, agreeing to take over assets from Signature that had been seized by regulators. This pushed assets to over $100 billion, leading to increased scrutiny from regulators.
NYCB said those tougher requirements led to the decision on Jan. 31 to cut the dividend and set aside more for future loan defaults — a disclosure that marked the start of a stock decline that didn't subside until Mnuchin announced his bailout.
On the day the $1 billion infusion was announced, the stock rose 6%.
NYCB's new CEO, former Comptroller of the Currency Joseph Otting, told analysts Thursday he wants the bank to have a more diverse loan portfolio, with a third in consumers, a third in businesses and a third in real estate.
A Signature store in Brooklyn last March after it was seized by regulators. (Brendan McDermid/REUTERS) (REUTERS/Reuters)
Currently, more than 44% of loans are in multifamily housing, including many rent-controlled apartment complexes in New York City.
Achieving this better balance may require more private solutions for NYCB. “Without another acquisition or possible CRE loan divestitures, things are going to be difficult,” Jonathan Winick, CEO of Chicago-based Clark Street Capital, told Yahoo Finance.
Asked whether the bank would need to raise more capital, Otting said the bank and its board needed “a little bit of time” to “develop the vision of how we see the future of the bank.”
He promised to share it when NYCB reports first quarter results.
“There is hard work ahead and the shape, timing and likelihood of success of any potential turnaround remains uncertain,” Bank of America NYCB analyst Ebrahim Poonawala said on Friday.
As a reminder, the stock fell again on Friday, falling 7% to close at $3.42 per share.
But Mnuchin and the other investors are still happy with their investment: They agreed to pay $2 per share.
David Hollerith is a senior reporter for Yahoo Finance, covering banking, crypto and other financial areas.
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