By Telis Demos
Recent regional banking crises have revived debates about the size of banks. Larger banks have been more insulated from some of the pressures hitting their smaller peers, such as deposit outflows and heavy concentrations in commercial-real estate lending.
This suggests that letting banks get bigger might be a pathway to stability -- though one that critics would charge shifts the burden to taxpayers to backstop more "too big to fail" behemoths, or would concentrate banking in a way that hurts customers.
Another problem: Getting to bigger banks means growing smaller- and medium-size banks. And what we are seeing is that this process can be fraught with risk.
Some of the issues at New York Community Bancorp -- which last week delayed its 2023 results report and named a new chief executive, and which has seen its share price decline about 70% this year -- are related to its expanding size.
NYCB doesn't share key characteristics of banks that were at the heart of last year's crisis sparked by Silicon Valley Bank's collapse, such as huge potential losses on bonds and reliance on uninsured, and thus more skittish, deposits. NYCB, as of the third quarter last year, reported no "held-to-maturity" securities in its portfolio, and as of an early February update, said nearly three-quarters of its deposits were insured or collateralized
But it did make recent jumps in asset size and is facing accompanying changes in its regulatory status. NYCB went from $90 billion in assets at the end of 2022 to over $110 billion as of its latest report. Last year it took on some of the assets and liabilities of seized Signature Bank from the Federal Deposit Insurance Corp.
With this growth, it crossed the threshold to become what is known in regulatory terms as a Category IV banking institution. Toward the end of 2022 it had completed its acquisition of Flagstar Bancorp, which brought its total assets up to $90 billion at the end of 2022 from $63 billion in the third quarter of that year.
NYCB said in January that a jump in loan-loss reserve levels in the fourth quarter of 2023 made it better aligned with "relevant bank peers, including Category IV banks." The bank also said the cut to its dividend announced in January would "accelerate the building of capital to support our balance sheet as a Category IV bank."
Large banks are subject to the Federal Reserve's stress tests, which measure how they respond to economic shocks. Category IV banks are generally subject to them every two years. The latest stress test scenario, for example, assumes a 40% decline in commercial real-estate prices. Based on how a bank would perform under that and other risk scenarios, it can then be given higher capital requirements.
NYCB also reported last week that "management identified material weaknesses in the company's internal controls related to internal loan review, resulting from ineffective oversight, risk assessment and monitoring activities." It has named new executives in charge of risk and auditing. The bank said earlier this year that as a Category IV bank, it would be subject to enhanced "requirements for overall risk management."
"As we continue our transformation into a larger, more diversified commercial bank, it is imperative that we strengthen the company's risk and compliance framework in order to drive the most value possible for our clients and shareholders," NYCB Executive Chairman and Chief Executive Alessandro DiNello said in a statement last week.
Fast-changing size was an underappreciated part of the story of Silicon Valley Bank. At the end of 2019, SVB Financial Group had total assets around $70 billion. It jumped to $115 billion the next year, and over $200 billion the following year. That was fueled in part by a surge in deposits, which went from about $60 billion at the end of 2019 to around $170 billion just before its collapse.
That leap in deposits, coinciding with a pandemic period when loan demand was weak, was part of why it and many other banks poured money into government bonds, even though yields were super low at the time.
A Federal Reserve review of SVB's supervision and regulation, published last April, noted that the bank's "core risk-management capacity failed to keep up with rapid asset growth." The bank's growth also changed how it was supervised. The report noted that supervision of the company was "complicated by the transition" from what is known as a Regional Banking Organization, or RBO, to a Large and Foreign Banking Organization, or LFBO, as it crossed $100 billion in assets.
So how could you get to bigger banks without these problems? The Federal Reserve's latest capital rule proposal would bring some standards to a wider range of banks, though regulatory approaches must also be "tailored" to a bank's size under current laws. There could also be a preference for already giant banks buying smaller ones. But that can raise other thorny competition issues.
When it comes to banking, there are rarely easy answers.
Write to Telis Demos at Telis.Demos@wsj.com
(END) Dow Jones Newswires
March 05, 2024 08:00 ET (13:00 GMT)
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