Former Treasury Secretary Steve Mnuchin is making a big bet that regulators don’t want NYCB to become the next SVB.
He and an investor group completed 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 seizure of California lender Silicon Valley Bank (SVB). That March 10 failure in 2023 triggered widespread panic in the banking system.
Mnuchin apparently tried to make certain this was OK with regulators. He told CNBC he had "extensive" conversations with the Federal Reserve and the Office of the Comptroller of the Currency, and they supported the injection.
There is a likely reason why: What regulators learned from the upheaval of a year ago is that they want to fix problems at individual banks before it’s too late — and certainly before a surprise seizure causes undue panic in the financial markets.
"We were not quick enough, we were not effective enough," Fed Chair Jay Powell told Senate lawmakers Thursday, referring to the Fed’s supervision of SVB. The lesson was that "earlier interventions and more effective ones" need to happen going forward.
Not only is a private solution for a troubled lender usually preferable to a public one, it’s also cheaper for the wider banking system.
"From the FDIC's standpoint, anytime you could have an open bank solution that doesn't involve the Deposit Insurance Fund, that's a good thing," Mitchell Glassman, an adviser with Secura/Issac, told Yahoo Finance.
No one "wants to undertake that burden, if they can avoid doing so," added John Popeo, a financial consultant and former attorney with the FDIC.
Big banks paid billions in the fourth quarter to cover the losses absorbed by the Federal Deposit Insurance Corporation from the failures of Silicon Valley Bank and New York lender Signature Bank, which was seized on March 13.
Banks will likely have to pay billions more still. The FDIC this week revised its total loss figure from the March 2023 failures up by roughly $4 billion, to $20.4 billion.
The concern haunting banks in 2024 has to do with commercial real estate, and whether lenders have enough set aside to deal with the losses that are expected from half-empty office buildings and multifamily apartment complexes no longer worth as much as they were pre-pandemic.
Powell, during his testimony to lawmakers this past week, said the Fed is in touch with banks to make sure they have enough liquidity and capital to absorb any losses from commercial real estate exposures.
"We are trying to stay ahead of it on a bank-by-bank basis and so far we have been able to do that," he said.
"I do believe it is a manageable problem," he added. "If that changes I will say so."
FDIC Chair Martin Gruenberg told reporters Thursday that commercial real estate remains a "downside risk for the industry, and it's certainly been a high priority for the FDIC and the other banking agencies in terms of our supervisory work."
The irony of NYCB’s predicament in 2024 is that a year ago it played the role of rescuer, agreeing to absorb assets from Signature that had been seized by regulators. That pushed it over $100 billion in assets, which brought heightened scrutiny from regulators.
NYCB has said those tighter requirements are what led to the decision on Jan. 31 to slash its dividend and set aside more for future loan losses — a disclosure that marked the beginning of a stock slide that didn’t let up until Mnuchin announced his rescue.
The stock rose 6% the day the $1 billion infusion was announced.
The new CEO of NYCB, former Comptroller of the Currency Joseph Otting, told analysts Thursday he wants the bank to have a more diverse loan book, with one-third in consumer, one-third in companies, and one-third in real estate.
Currently, more than 44% of its loans are to multifamily properties, including many rent-regulated apartment complexes in New York City.
Getting to that better balance may require more private solutions for NYCB. It "is going to be difficult without another acquisition or potential divestitures of CRE loans," Jonathan Winick, CEO of Chicago-based Clark Street Capital, told Yahoo Finance.
When asked if the bank wouldn't need to raise more capital, Otting said the bank and its board need "a little bit of time" to come up with "the vision of the way we see the future of the bank."
He pledged to share it when NYCB reports first quarter earnings.
"There is heavy lifting ahead and the shape, timing and the probability of success of any potential turnaround remains an unknown," Ebrahim Poonawala, an analyst covering NYCB for Bank of America, said Friday.
As a reminder, the stock dropped again on Friday by 7%, closing at $3.42 a share.
But Mnuchin and the other investors are still up on their investment: They agreed to pay $2 a share.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas in finance.
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