New York State of Mind

The State of US Regional Banks

In March 2021, two years before it failed, oversight for Silicon Valley Bank shifted to a new department inside the Federal Reserve. With responsibility for supervising over 3,700 banks, the Federal Reserve distributes its workload across several divisions each focused on differently sized firms. The Community Banking Organization looks after banks with less than $10 billion of assets; the Regional Banking Organization looks after banks with between $10 billion and $100 billion of assets; and the Large and Foreign Banking Organization looks after banks with more than $100 billion of assets (as long as they are not globally systemically important, in which case the Large Institution Supervision Coordinating Committee takes over). When Silicon Valley Bank tripped the $100 billion threshold, it was time for a move. 

Fresh on the case, the Regional Banking Organization upped the number of supervisors keeping watch over Silicon Valley Bank from eight to 20. But so as not to jam the bank with more stringent standards overnight, a transition period was granted. The new team started vetting Silicon Valley Bank’s supervisory ratings six months after the transfer and, armed with a waiver to delay their findings by another six months, they didn’t release revised ratings until August 2022. 

“The delay until August 2022 in issuing the 2021 supervisory ratings illustrates how the normal supervisory practices did not keep up with SVBFG’s rapid expansion,” regulators later admitted. “While supervisors did issue supervisory findings, the delay in a rating downgrade meant that SVBFG effectively continued to operate below supervisory expectations for more than a year despite its growing size and complexity.”

Having been burned once, supervisors were keen for it not to happen again. So when New York Community Bancorp (NYCB) shot through the $100 billion asset threshold, regulators were quick to respond. This week, the bank cut its dividend to preserve capital, and bolstered both its loan loss reserves and its liquidity buffers. “We have pivoted quickly and accelerated some necessary enhancements that come with being a $100 billion-plus Category IV bank,” said its CEO. “With this in mind, during the fourth quarter, we took decisive actions to build capital, reinforce our balance sheet, strengthen our risk management processes, and better align ourselves with the relevant bank peers.”

The market was caught by surprise. NYCB’s stock fell 45% over two days, taking out the long-term low it hit during the regional banking crisis last year. Having written a lot about the crisis as it happened, I retired the series in May. But performance this week prompts questions over whether it should be revived. To see if that’s the case, read on…