The Sound of Many Band-Aids

by | Mar 4, 2024 | Risk Report | 0 comments

We were going to give credit risk and commercial real estate a pass this week, but the news wouldn’t let us.

Late Thursday our already troubled friend, New York Community Bancorp (NYCB), said it had discovered “material weaknesses” in how it tracks loan risk. The weaknesses apparently stem from ineffective oversight, risk assessment, and loan monitoring.

At the same time, NYCB wrote down past investments to the tune of $2.4bn and replaced its CEO with immediate effect. One hears the sound of many band-aids being ripped off.

Remember that NYCB is a big commercial real estate lender, and last year it grew itself into a higher weight class of regulation by buying up some of Signature Bank’s deposits and loans.

Stricter regulation, of course, means more risk disclosure and public scrutiny. NYCB’s stock has already nose-dived more than 50% this year from the bank announcing expected losses on apartment buildings, and the Thursday news hit the share price with another 26% down.

“One bank does not make systemic risk,” you say, and that is true. We could chalk this up in the column of NYCB’s unique circumstances and congratulate ourselves that the losses were expected.

However, this week FT looked at how much CRE really touches US banks, and brought this graphic from a UBS analysis:

Chart shows the importance of smaller vs. larger banks and non-banks (by loan/debt holdings); non-banks and large banks hold most of the debt stock across categories.

Source: UBS, Financial Times

The first point to notice is that half of the CRE loans come from non-banks. That trots out the good ole it-could-be-worse adage. That is different from it being great for the banks in an absolute sense, which brings us to the second point. Almost 20% of CRE loans come from banks with less than $10bn is assets. Those are some big-butter loans for a lot of small banks.

While that might not ruin any sleep from a systemic perspective, it does warrant some worry on behalf of the little guy. They have a less diversified balance sheet, are more sensitive and prone to deposit flight, and CRE loans are typically bigger than most of the other loan types shown, not to mention the high contagion of bank runs in this segment.

We’re not out of the empty (office) building, yet!

Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.