Former Treasury Secretary Steve Mnuchin has recently completed a $1 billion deal to inject new capital into troubled lender New York Community Bancorp (NYCB), signaling a big bet that regulators do not want NYCB to suffer the same fate as Silicon Valley Bank (SVB). Mnuchin’s move comes just days before the one-year anniversary of the government seizure of SVB, which triggered widespread panic in the banking system in March 2023.
Mnuchin, who reportedly had extensive conversations with the Federal Reserve and the Office of the Comptroller of the Currency, sought to ensure that regulators supported his injection of new capital into NYCB. This is likely because regulators have learned from the upheaval of a year ago that it is better to fix problems at individual banks before it is too late, and certainly before a surprise seizure causes panic in the financial markets.
The preference for a private solution in dealing with troubled lenders is not only beneficial to the banking system but also to the Federal Deposit Insurance Corporation (FDIC), as it avoids the need to involve the Deposit Insurance Fund. Mitchell Glassman, an adviser with Secura/Issac, pointed out that the FDIC views an open bank solution positively. Financial consultant John Popeo also highlighted that avoiding the burden of a government takeover is something that banks strive for.
The failures of SVB and Signature Bank in March 2023 resulted in significant losses absorbed by the FDIC, and big banks had to pay billions in the fourth quarter to cover these losses. The FDIC has revised its total loss figure from the March 2023 failures to $20.4 billion, indicating that there may still be additional losses for banks to bear.
Looking ahead, the banking industry’s concern in 2024 centers around commercial real estate and the potential for losses from half-empty office buildings and apartment complexes no longer valued as highly as before the pandemic. Federal Reserve Chair Jay Powell stated that the Fed is in touch with banks to ensure they have enough liquidity and capital to absorb any losses from commercial real estate exposures. Powell believes it is a manageable problem for now but emphasized the need for proactive measures if the situation changes.
