On Friday (March 1) local time, the credit rating of New York Community Bank (NYCB) was downgraded to junk by Fitch Ratings, while Moody's Investors Service (MIS) also further downgraded its rating. A day earlier, New York Community Bank said it had found significant flaws in the way it tracks loan risk.
Fitch downgraded the long-term IDR of New York Community Bank to BB+ from BBB-, one notch below investment grade, according to a statement released on Friday. At the same time, Moody's downgraded its rating to B3 from BA2. Last month, Moody's downgraded its rating to junk. Fitch said the deficiencies identified by the New York Community Bank prompted the bank to reconsider its controls on the adequacy of provisions, particularly in terms of concentrating investments in commercial real estate.
The New York Community Bank's announcement on Thursday that the bank needed to step up its lending review reigned on renewed investor concerns that the bank could face exposure to struggling commercial property owners, including apartment landlords in New York. On Friday, New York Community Bank shares were 26% worth the market, although the bank said it did not expect poor controls to lead to a change in its provision for credit losses. And Moody's said in a statement: "We believe that New York Community Bank may have to further increase its provision for credit losses over the next two years due to credit risk in office loans." In addition, there is a significant repricing risk for its multifamily loans. ”
On Friday, shares of New York Community Bank closed at 3$55, bringing its year-to-date decline to 65%. Alessandro Dinello, the new CEO of Zhou, said in a statement earlier on Friday: "We have strong liquidity and a solid deposit base. I am confident that we are capable of executing our turnaround plan to deliver more value to our shareholders. ”
In response to this series of events, Insight Finance can analyze the credit crisis faced by New York Community Bank (NYCB) and the impact of its rating downgrade from several key points:
The credit rating has been downgraded to junk level! Fitch and Moody's are internationally renowned credit rating agencies, and their rating decisions have a direct impact on the market's judgment of banks' solvency and operational soundness. It has been downgraded to junk by two institutions in a row, which strongly hints at the market's concern about the credit status and development prospects of New York Community Bank. The junk rating means that the bank's debt risk has risen significantly, which could have a serious impact on its financing costs, customer confidence, asset quality and other aspects.
Major flaws found! The disclosure by acknowledging significant shortcomings in the way New York Community Bank tracks loan risk has deepened doubts about its risk management capabilities. Loan risk is at the heart of a bank's business, and any problem in this area could lead to a surge in non-performing loans, which in turn erodes capital adequacy ratios, impacts profitability and can trigger liquidity risk.
Market reaction and follow-up development! A sudden drop in credit ratings usually leads to sharp fluctuations in a bank's share price, adding to investor panic and potentially triggering a withdrawal of funds. In addition, banks will have to pay more to attract new creditors, and the cost of refinancing existing debt will be higher. In order to restore market confidence and improve ratings, New York Community Banks must take strong corrective measures, including but not limited to strengthening risk management, improving capital adequacy ratios, optimizing asset structure, and possibly realigning management.
Regulatory & Policy Interventions! Given the importance of such events to the stability of financial markets, regulators are likely to keep a close eye on banks' movements and may step in to ensure the safety and stability of the banking system. Community banks in New York may need to work closely with regulators to develop and implement effective corrective action plans.
To sum up, New York community banks are facing not only a short-term market trust crisis, but also the challenge of reshaping their long-term business operation model and risk management mechanism. The downgrade is a stark warning to the bank's current predicament and an impetus for its aggressive reforms.
So, why do small and medium-sized banks in the United States frequently explode? Insight Finance believes that the main reasons can be summarized as follows:
The Federal Reserve's aggressive interest rate hike policy. Between 2022 and 2023, the Federal Reserve adopted a rapid and large rate hike strategy in response to high inflation, resulting in a rapid rise in market interest rates. As a result, the value of bonds and other fixed-income investments has fallen, especially those issued during a prolonged low-interest rate environment. As some small and medium-sized banks hold a large number of these assets, as interest rates rise, these assets shrink sharply, resulting in damage to bank capital.
Deterioration in asset quality. In a high-interest rate environment, repayment pressure has increased for corporate and personal loan customers, especially in the commercial real estate sector, which is more sensitive to interest rates. As interest rates rise, the value of commercial real estate may rise, leading to higher loan defaults, and banks will need to make more provisions for loan losses, which in turn will affect their financial soundness.
Liquidity is tight. Small and medium-sized banks** tend to be more reliant on deposits for their funds, and when market uncertainty increases, depositors may accelerate the withdrawal of deposits, creating a run risk. The Fed's interest rate hikes may also prompt capital to flow to higher-return investment channels, leaving small and medium-sized banks facing liquidity shortages.
Inadequate risk management. Some small and medium-sized banks may have loopholes in asset allocation, risk management and compliance operations, such as failure to accurately assess and manage loan portfolio risks, or mistakes in interest rate risk management.
Regulatory deficiencies. The regulatory framework of the U.S. banking industry, while complex and stringent, can be subject to regulatory lapses or weak enforcement at the regional level, particularly in identifying and preventing potential risks for small and medium-sized banks.
Macroeconomic factors. Weak global economic conditions, increased volatility and slowing economic growth may indirectly affect the asset quality and profitability of small and medium-sized banks, exacerbating their operational difficulties.
Insight Finance believes that the frequent crises of small and medium-sized banks in the United States are mainly caused by the superposition of multiple internal and external factors, including the market impact caused by monetary policy adjustments, the bank's own risk management deficiencies, and regulatory limitations. These issues interacted and eventually led to multiple cases of banks going bankrupt, being taken into receivership, or being forced into bailouts.
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