Regional Banks Face Unrest and Warn of Possible Crisis

About a year ago, the collapse of three midsized American banks sent shockwaves through the industry. Now, it seems we’re heading back toward uncertain territory, as the specter of commercial mortgage defaults looms over regional banks. The trigger could be the New York Community Bank (NYCB), which recently reported substantial losses on its property loans. The news has caused NYCB’s stock to tumble by 60%, pulling other regional banks down with it.

Ironically, NYCB was a beneficiary of the previous crisis, taking over Signature Bank when regulators shut it down following a bank run. But this time, the threat is commercial property debt, which is escalating rapidly as landlords struggle with high interest rates and shrinking tenant lists after years of partially filled offices.

Despite the U.S. banking system’s shift toward national titans, regional banks still shoulder a significant portion of commercial mortgages. On average, these loans make up 3% of the assets at the country’s 10 biggest banks. But for the next 150, that figure jumps to almost 20%.

NYCB confessed that nearly half of its loans were given to apartment complexes, with many of those tied to rent-stabilized units. The landlords of these buildings are finding it hard to keep up, as their own costs continue to rise. The situation is so grim that the deposits these banks depend on are at risk due to the government’s $250,000-per-account insurance cap. Uninsured deposits are usually the first to be withdrawn, leaving banks on the brink.

The issue is even more troubling than what we experienced last year. Previously, the crisis was largely due to imprudent investment decisions and inadequate financial defense strategies against rising interest rates. But this time around, the problem is rooted in core banking functions. Banks are floundering because of poor judgment in assessing their borrowers, leading to loans being disbursed to uncreditworthy businesses or not charging enough interest to mitigate risk.

This turmoil adds a new layer of unease compared to the previous crisis, which was primarily precipitated by unprecedented pandemic events such as inflated savings accounts, ballooning inflation, and rapid interest rate hikes by the Federal Reserve.

Compounding the situation, regulatory authorities are in the hot seat, having approved NYCB’s purchase of another collapsing bank last year. Their premature confidence in NYCB is cause for concern, proving embarrassingly misguided in light of Moody’s recent findings of “multi-faceted financial, risk-management and governance challenges.”

While some argue that quick asset sales could prevent a bank collapse and that banks are resisting dire predictions, the high number of regional banks under the watchful eye of the FDIC paints a worrying picture.