NYCB once again experienced a significant drop, causing concerns on Wall Street about more small banks having insufficient provisions for commercial real estate loans.
NYCB's stock price has fallen nearly 60% in the past week. Yellen stated that the risks in the commercial real estate sector are manageable, and regulatory agencies are closely monitoring the situation.
Despite regional banks setting aside more reserves to cope with the commercial real estate crisis, Wall Street remains concerned about the sustainability.
On Tuesday local time, NYCB's stock price plummeted by 22.2% again, closing at $4.20, reaching a new low since 1997. Since the unexpected loss announcement on January 31st, NYCB's stock price has fallen nearly 60%, with a market value evaporating by approximately $4 billion.
Last week, Wall Street Journal mentioned that the stock prices of many regional banks with high exposure to commercial real estate risks also fell, including Japan's Aozora Bank and Deutsche Bank.
Wall Street believes that many other regional banks may have to make more provisions this year to absorb potential losses from commercial real estate, which also means less profit.
Manan Gosalia, a regional bank analyst at Morgan Stanley, stated in a research report on Friday:
"We believe that the consensus for 2024 provision expenses is too low for almost all the banks we cover."
In addition to concerns about the banks themselves, there is also a concern about whether regulatory agencies will force banks to set aside more funds to deal with the crisis.
Wall Street Journal previously mentioned that the Office of the Comptroller of the Currency (OCC) has pressured New York Community Bank to set aside more reserves and reduce dividends to prevent potential problems with commercial real estate loans.
David Chiaverini, an analyst at Whalen, who was bearish on NYCB last year, told the media:
"(Regulatory agencies are) calling and asking, 'What does your commercial book look like?'"
Chiaverini added that the concern of regulatory agencies is that higher commercial real estate risks may lead to banks being "blacklisted" by investors.
Chiaverini also pointed out in a research report, "What really frustrates us about NYCB and other banks with such risks is that they knew months ago that the OCC had started asking banks to increase capital and loan loss reserves to deal with the risks."
Chiaverini explained:
"Why? (Because) assuming some commercial real estate valuations in the $20 trillion market decline sharply, default rates will skyrocket in 2024."
Yellen: Commercial Real Estate Crisis Under Control
Amidst the prevailing concerns, the US government offers a "reassurance pill".On Tuesday local time, US Treasury Secretary Yellen told lawmakers at a congressional hearing that while the losses in commercial real estate are concerning, US regulatory agencies are working closely with banks to ensure that "loan loss reserves are sufficient to cover losses" and "dividend policies are adequate to address" the situation.
Yellen pointed out that the rise in commercial real estate rates and vacancy rates due to the popularity of remote work, as well as the upcoming wave of commercial real estate loans maturing this year, "will put a lot of pressure on these property owners." She also stated:
"I am concerned. (However) I believe this is manageable, although some institutions will face significant pressure due to this issue."
However, Yellen did not comment on the questions regarding NYCB, stating:
"I don't want to comment on the situation of individual banks, but commercial real estate is an area that we have long recognized as potentially posing stability risks to the banking system, and it is an area that requires serious regulation."
Chiaverini told the media that NYCB's issues are unique, as its "investment portfolio carries greater risks" and its reserves are "very inadequate".
It is reported that NYCB's loan loss provisions in the fourth quarter amounted to $552 million, far exceeding market expectations and the $62 million in the previous quarter.
However, Chiaverini stated that a "perfect storm" could still pose problems for other sectors of the industry if inflation rises and forces the Federal Reserve to maintain higher interest rates for a longer period, which could lead to loan defaults.
However, he added that if such a scenario does not occur, the pain in commercial real estate should be "manageable" for banks.