New York Community Bank (NYCB) is under pressure as the bank's shares continue to fall on its fourth-quarter losses and lack of faith in the regional banking system. The one-year anniversary of Silicon Valley Bank's collapse approaches, causing investors to take a step back and review how the situation played out.
In terms of the differences between the current situation with NYCB and SVB,
Kelly differentiates the NYCB situation from SVB: "It's very much a different animal. There's much less panic this time around. So this is sort of an extension, we're talking about fragilities that ultimately go back to a higher interest rate environment, the Fed [Federal Reserve] moved very fast on interest rates in a way that the market wasn't expecting. But the market has had a year to look at banks and sort of differentiate between what's strong and what's not and what similarities... actually can drive financial distress."
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RACHELLE AKUFFO: We're a little over a year out from the collapse of Silicon Valley Bank and New York Community Bank reigniting concerns in the regional banking sector after raising its loan loss allowance. Our next guest thinks there might still be some of the same lingering fragilities that led to SVB's collapse. For more on this, we have Steven Kelly, Yale Program on Financial Stability associate director of research. Thank you so much for joining me in this morning.
So first, I want to take a look at what's been happening with New York Community Bank here. Obviously, a different beast than Silicon Valley Bank. But what are some of the fragilities that this is highlighting?
STEVEN KELLY: Well, it's sort of the classic bank recessionary type dynamic. So we're not in a recession now. But we had a tech and crypto recession a year ago that sort of turned into the SVB collapse. And now, we're kind of in this weird commercial real estate space where it looks like there's going to be a lot of stress in CRE at least for the next couple of years.
And so what we see are these specialized banks. You sort of can't be large and have the attention of the market and be specialized. Because if you see a recession in that sector by itself, it's going to take the bank with it.
RACHELLE AKUFFO: And so then as we look back on the SVB anniversary then, is it fair then to look at those lessons and compare them to what we're seeing with New York Community Bank?
STEVEN KELLY: You know, it's very much a different animal. There's much less panic this time around. So this is sort of an extension, right? We're talking about fragilities that ultimately go back to a higher interest rate environment. The Fed moved very fast on interest rates in a way that the market wasn't expecting.
But the market has had a year to look at banks and sort of differentiate between what's strong and what's not and what similarities are actually-- can drive a financial distress. And so we've really seen not much contagion to other regional banks, other banks in general. So it's sort of a different animal and really focused on NYCB.
RACHELLE AKUFFO: And I want to talk about some of the narratives that came out of SVB, whether it was the role of social media or some of the speed of these financial transactions now that people have been talking about. When you look at that, how accurate is that when we now have the luxury of hindsight a year later?
STEVEN KELLY: Yeah. It sort of doesn't stack up, right? Because modern bank runs really are institutional. They're about large dollar balances. There was a lot of hay made over circles. $3.3 billion, right? This is not somebody who's looking at Twitter or using their digital banking apps to transfer money out. We sort of have this sort of romantic historic notion of bank runs as people lining up outside.
But that's really not how modern bank runs work. And the social media and digital apps story is really a retail story. And that's just not at the core of modern bank runs, which happened by large institutions with large uninsured deposits.
RACHELLE AKUFFO: So for people who are wondering about perhaps investing in some of these regional banks, what should they be aware of, given that they are such different beasts? Some of these very specialized lenders, one that focused on [? also ?] startups that needed more liquidity versus what we're seeing with commercial real estate and New York Community Bank.
STEVEN KELLY: Yeah. This is something where it really pays to understand the macro story behind the balance sheet. So you really can't have a banking panic without some sort of macro story. In 2008, it was basically the whole economy, right? The housing sector and the business model of all of Wall Street looked bad. This time around, we didn't see that. We saw sort of the macro forces really take down tech and crypto last year. And now, we're working on CRE.
And so following that story from-- OK. What is the macro sector that's hurting and how is it going to affect the deposit side of a bank balance sheet is really the way to analyze this story. And you know, like I alluded to, 2008 was very much a different story where you had the balance sheet and the business model of all of Wall Street basically break down. And that was never really a risk here, right? We sort of got a list of names last March-- techie banks, venture capital banks. And now we're kind of looking at CRE banks, particularly with New York.
RACHELLE AKUFFO: And so then Steven, in terms of the risks ahead and how some of the legislation that came about as a result of SVB's collapse could potentially either prevent or perhaps limit the impact of future risks in the regional banking system, what have you got your eye on there?
STEVEN KELLY: Well, the Fed has very much been talking about the discount window lately and its provision of emergency liquidity, right? SVB and Signature were very much not prepared to borrow from the discount window. This is not a panacea. Some folks like to think this can save a bank. It can buy them a couple of days. And it's good for containing systemic risk, right? Because everybody's liquidity demands go up once there's a banking panic. So that one regulator seem very on top of and you're hearing momentum from Fed officials on that.
Other things that we heard in the aftermath like deposit insurance-- we're not hearing so much. There's basically no momentum. Obviously, Basel III Endgame and higher capital requirements not really addressing what we saw in the last year. Although some folks have made it out to be sort of a treatment for what we saw last March. It really predates that. And it looks like it's in a lot of trouble politically.
