In initially explaining one of the catalysts behind New York Community Bank’s surprise fourth-quarter loss, CEO Thomas Cangemi cited crossing the $100 billion-asset threshold “sooner than anticipated.”
Michael Barr, the Federal Reserve’s vice chair for supervision, in a speech Friday, pledged that regulators would put more focus on that transition going forward.
“We have been working to introduce more coordination between the regional bank and large bank supervisory programs,” Barr said at the Columbia Law School Banking Conference. “The goal is that the transition to heightened supervision for fast-growing banks is more of a gradual slope and not a cliff.”
Barr cited the Fed’s supervision of Silicon Valley Bank as a lesson learned, noting that much of the buildup of risk there occurred before it surpassed $100 billion.
“Based on this experience, for large and more complex regional banking organizations, including firms that are growing rapidly, we are assessing such a firm's condition, strategy and risk management more frequently, and deepening our supervisory interactions with the firm,” Barr said.
Barr’s speech Friday marked one of several times regulators — and fellow bankers — talked about NYCB this week without specifically mentioning the bank’s name.
The Hicksville, New York-based lender’s announcement Jan. 31 that it would cut its dividend and set aside $552 million to offset potential credit losses — mostly from commercial real estate loans — sparked a precipitous drop in the bank’s stock price and stoked fears that the regional banking sphere was not as solid as once believed.
Barr downplayed the panic in a separate speech Wednesday at the National Association for Business Economics policy conference.
“A single bank missing its revenue expectations and increasing its provisioning does not change the fact that the overall banking system is strong, and we see no signs of liquidity problems across the system,” Barr said. “Nevertheless, we continue to monitor conditions carefully across the sector, just as we always do.”
Noting that conditions are is “much better” than last spring, Barr said “there are a few pockets of risk that we continue to watch, including the pandemic's persistent impact on office commercial real estate in certain central business districts.”
Barr expanded on that Friday, saying supervisors are “closely focused” on CRE developments.
That includes “continuously monitoring” a “small number of banks with a risk profile that could result in funding pressures for the firm,” Barr said Friday, adding that the Fed has issued “more supervisory findings and downgraded firms' supervisory ratings at a higher rate in the past year” — and issued more enforcement actions, too, as a result of the heightened risk environment.
Bloomberg analysts, for their part, crunched some numbers and determined nearly two dozen banks fit criteria that the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency warned last year would warrant increased scrutiny.
The regulators indicated they would look closely at banks whose portfolios of CRE loans are more than triple their capital. Within that group, examiners would focus on portfolios that had grown by at least 50% over the past three years.
NYCB was the biggest bank to come close to those criteria, Bloomberg found: It counted more than $100 billion in assets and had CRE loans amounting to more than 300% of capital by Sept. 30. But its portfolio at a pace that wasn’t quite at the level regulators were eyeing.
For reference, NYCB bank reported $63 billion of assets before it acquired Flagstar. After the transaction, assets numbered $90.1 billion, a 43% increase, according to American Banker. Once it absorbed much of Signature Bank, NYCB grew to $123.7 billion, a 37% jump from the previous quarter.
“I think after Signature, the OCC went into New York Community looking for potential problems, particularly problems caused by fast growth," Chip MacDonald, managing director at MacDonald Partners in Atlanta, told American Banker. “Fast growth is always a red flag, for regulators and risk.”
Bloomberg’s analysis spotlighted three other lenders that did match the 300%/50% criteria: Valley National Bank, WaFd and Axos Financial.
Valley National has seen its share price fall 17% — a fraction of NYCB’s drop — since Jan. 31. But Travis Lan, the bank's deputy CFO, in comments to American Banker, noted that "not all CRE portfolios are created equally.”
CRE-related loans comprise about half of Valley National's portfolio, but the rent-regulated portion accounts for less than 1% of its total loans, according to the publication. NYCB’s real estate portfolio, by contrast, is largely made up of rent-regulated multifamily buildings.
Valley CEO Ira Robbins, in comments to Bloomberg, stressed the importance of “a good dialogue with your regulators.”
“We feel we have a really good dialogue and not much concern,” Robbins said. “Look, the regulator has to do their job and understand what's going on in the market. And if there's heightened concern — scrutiny — associated with a specific segment, they're definitely coming in and spending more time looking at that. But I don't think it's anything out of the ordinary versus what would've happened if there was more concern within another sector.”
As for the focus on CRE, Keith Noreika, who led the OCC in an acting capacity in 2017, told Bloomberg that regulation is at a “warning stage.”
“There’s a light going off on the dashboard and now people are opening up the hood to see: Is it really wrong or do we just need to keep our eye on it?” Noreika said.
