The Regional Banking Crisis Resumes…

NY Community Bancorp, which is a regional bank such as SVB, experienced a staggering 38% drop in its stock price 2 days ago. This was a direct result of the shocking disclosure of a $252 million loss. In response, the bank took immediate action to address its financial situation by reducing its quarterly dividend and bolstering its loan-loss reserves with an infusion of half a billion dollars. This disconcerting turn of events prompted Moody's, the credit rating agency, to initiate a review of the bank's credit rating with a potential downgrade looming on the horizon.

As of early February 2nd, NYCB stock is down 45%, adversely affecting the market value of many other regional banks. This alarming setback has reawakened concerns regarding the stability of the banking system. Regional banks, in particular, find themselves more exposed and vulnerable to commercial real estate loans. Goldman Sachs expects more pain for regional banks stating that an estimated 80% of all bank loans for commercial properties come from regional banks​​. The looming specter of significant defaults, especially in the office sector, is an outcome of the persistent challenges faced since the pandemic forced millions of Americans into remote work arrangements, casting a shadow of uncertainty over the entire banking industry.

Furthermore, with interest rates exceeding 5% and more than $1.5 trillion in commercial mortgages set to mature over the next three years, it is estimated that potentially 30% of these loans will not qualify for refinancing, leading to a substantial increase in defaults. As the commercial real estate market experiences a severe downturn, the billions of dollars in loans and investments pose a critical risk to the banking sector and by extension, the wider economy. Gregg Williams, principal receiver at Trident Pacific, a receivership firm specializing in defaulted commercial mortgages remarked, "What we're witnessing is the unfortunate convergence of the most rapid interest rate increase within a single year and the evolving dynamics of the modern workforce."

In July 2023, MSCI Real Assets estimated that commercial property sales were down more than 70% from the prior year. According to Michael Comparato, head of commercial real estate at Benefit Street Partners, a debt-oriented investment firm, the market will face considerable turmoil when buying resumes in the commercial property sector. They are also forecasting significantly reduced prices which is expected to hit the banks hard. He predicts, "It's going to be really nasty."

Only time will tell if the March 2023 banking crisis was just the beginning of a larger banking meltdown, but it's noteworthy that gold appreciated by 13.5% last year, with the central banks of leading nations being its largest purchasers.