The financial landscape was recently shaken when New York Community Bancorp, a regional banking giant known for its acquisition of Signature Bank's deposits, experienced a dramatic drop in its share value. This followed the revelation of an unexpected fourth-quarter loss. Contrary to analysts' expectations, the bank subsequently announced a reduced quarterly dividend. The fall in the stock price was also attributed to a deteriorating credit outlook, which led the bank to significantly increase its loan-loss provisions.
The acquisition of Signature Bank's deposits had previously catapulted New York Community Bancorp into a more stringent regulatory category, requiring higher capital reserves. The collapse of Signature Bank, along with two other US banks last year, highlighted the fragility of financial institutions in adjusting to the recent rise in interest rates, which diminished the value of their bond holdings and led to mounting unrealised losses on their balance sheets. In particular, New York Community Bancorp's Flagstar Bank unit agreed to acquire Signature's assets from the Federal Deposit Insurance Corp.
The US regional banking crisis was a significant event marked by a series of bank failures and financial turmoil among regional and mid-sized banks. Triggered by a mix of rapid interest rate hikes by the Federal Reserve, disproportionate exposure to the commercial real estate sector, liquidity crises, and panic withdrawals by customers, this period was reminiscent of the dark days of the 2008 financial meltdown. In particular, the crisis was initiated by the collapse of Silicon Valley Bank (SVB) in March 2023, marking the most significant bank failure since 2008, followed by the collapse of Signature Bank, among others.
These institutions were particularly vulnerable due to a high proportion of uninsured deposits, exposing them to the risk of swift fund withdrawals by depositors. The unrealised losses in their bond portfolios on the balance sheet as a result of the rise in interest rates severely affected their ability to secure liquidity, making it challenging to meet withdrawal requests. Each withdrawal request forced the institutions to sell bonds to generate liquidity, thereby converting unrealised losses in the bond portfolio into realised losses in the profit and loss account, thus reducing the regulatory equity ratios. Reported losses then trigger further deposit withdrawals, creating a vicious circle.
The repercussions of the crisis have not been confined. Global spillovers are evident, as the fate of Aozora Bank Ltd last week illustrates. The Japanese bank's announcement of its first loss in 15 years due to bad loans linked to US property signifies the international ramifications of high US interest rates. These developments underline the need for vigilance regarding losses in banks' portfolios and exposure to the real estate sector.
The recent crisis has reminded investors that the US regional banking crisis of March 2023 has not yet been fully digested, as it exposed the looming vulnerabilities of the regional banking sector and prompted calls for a regulatory overhaul to avert future catastrophes. It has highlighted the critical importance of sound risk management practices and the profound impact of monetary policy changes on financial institutions.
The concept of spillovers is particularly relevant, giving rise to the "wake-up" hypothesis in crisis discourse. This theory suggests that increased awareness of vulnerabilities can lead to a rapid decline in the stock market value of lenders. Therefore, it is imperative to remain vigilant and proactively identify potential risks, reinforcing the need to pay attention to heightened financial risks in a globalised landscape. As a result, investors seeking exposure to the US banking landscape at this stage of the cycle should clearly favour the large-capitalised, highly regulated banks with strong capital bases over the much less regulated regional banking segment with disproportionate exposure to commercial real estate.