NYCB Stock Crash Shows Risks of Rapid Growth in Banks and Commercial Real Estate

• The collapse of New York Community Bancorp highlighted the unusual risk for banks of growing too fast.
• New York Community Bancorp’s stock price plunged 64% in part due to increased regulatory scrutiny after the company surpassed $100 billion in assets.
• “Ironically, if not for the local banking crisis, New York Community Bancorp may never have passed the $100 billion asset threshold,” said economist Mark Rubinstein.

American capitalism fosters growth and investors reward companies for it. But it can be a completely different story in the banking sector, with New York Community Bancorp being the latest example.

The Long Island-based bank shocked investors last week by cutting its dividend by 70% to save needed capital.

Since then, New York Community Bancorp’s stock has plunged 64%, reigniting fears of another local banking crisis.

The turning point in the turmoil came last year when New York Community Bancorp decided to buy assets from the defunct Signature Bank, which collapsed shortly after the Silicon Valley Bank bombing.

The acquisition brings New York Community Bancorp’s assets to more than $100 billion in the market and, with it, stricter regulations.

Economist Mark Rubinstein said last week: “Ironically, if not for the local banking crisis, New York Community Bancorp may never have crossed the $100 billion asset threshold.” “At the end of 2022, the company had total assets of $90 billion, which was put in jeopardy by the acquisition of Signature Bank, which was taken out of receivership.”

Additionally, foreign banking regulators have traditionally given banks flexibility to meet required capital ratios when assets exceed $100 billion, but after the Silicon Valley Bank collapse, the lenient The string became even tighter.

“Normal supervisory practices have not kept pace with SVBFG’s rapid expansion,” regulators later said in a review of the Silicon Valley bank’s failure. “The delay in the downgrade means that SVBFG has continued to operate below supervisory expectations for more than a year, despite its increasing size and complexity.”

Now, New York Community Bancorp is struggling to get back to its proper size after growing too quickly, and its efforts are costing investors dearly.

“We pivoted quickly and implemented some of the necessary changes that come with being a $100 billion-plus Category IV bank,” New York Community Bancorp CEO Thomas Cangemi said on an earnings call last week. We have accelerated our efforts to strengthen the system.” These “enhancements” include setting aside $552 million to cover loan losses.

Those efforts include trying to reduce some of its mortgage exposure and selling off its recreational vehicle loan book, according to a recent Bloomberg report.

These efforts highlight the perverse nature of banks growing too quickly in the U.S., as the weight of regulatory oversight can upend growth plans normally backed by Wall Street.

And given the economic turmoil the country experienced, in part due to the loosening of regulations on the financial sector leading up to the Great Recession of 2008, that’s probably OK. But for investors, it highlights the risks of investing in the banking sector.

“This case confirms a core tenet of banking, which may seem counterintuitive, that growth in the banking industry is… bad,” Rubinstein said. “This is a lesson that financial institutions repeatedly learn from a variety of sources of growth.”