NYCB's stock crash shows the peril of a bank growing too fast (2024)

• The implosion of New York Community Bancorp highlights an unusual risk for banks: growing too fast.
• New York Community Bancorp's 64% stock crash was in part caused by the increased regulatory scrutiny it received after crossing $100 billion in assets.
• "The irony is that if it wasn't for the regional banking crisis, New York Community Bancorp may never have triggered the $100 billion asset threshold at all," economist Marc Rubinstein said.

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

The Long Island-based bank shocked investors last week when it slashed its dividend by 70% to help conserve much needed capital.

Since then, New York Community Bancorp stock has crashed 64% and reignited fears of another regional banking crisis.

A tipping point for the turmoil came last year when New York Community Bancorp decided to buy assets from the defunct Signature Bank, which failed shortly after the implosion of Silicon Valley Bank.

That acquisition tipped New York Community Bancorp's assets past the $100 billion market, and with it came a much more stringent set of regulations.

"The irony is that if it wasn't for the regional banking crisis, New York Community Bancorp may never have triggered the $100 billion asset threshold at all," economist Marc Rubinstein said last week. "At the end of 2022, it had $90 billion of total assets, but its acquisition of Signature Bank out of receivership tipped it over the edge,"

And while the Large and Foreign Banking Organization regulator in the past has given banks flexibility in meeting its required capital ratios once crossing the $100 billion asset threshold, that loose leash got a lot tighter following the Silicon Valley Bank failure.

"The normal supervisory practices did not keep up with SVBFG's rapid expansion," regulators later said in their review of Silicon Valley Bank's downfall. "The delay in a rating downgrade meant that SVBFG effectively continued to operate below supervisory expectations for more than a year despite its growing size and complexity."

Now New York Community Bancorp is scrambling to right-size itself after growing too fast, too quickly, and those efforts are being bundled with stinging losses for investors.

"We have pivoted quickly and accelerated some necessary enhancements that come with being a $100 billion-plus Category IV bank," New York Community Bancorp CEO Thomas Cangemi said on the company's earnings call last week. Those "enhancements" include setting aside $552 million to cover loan losses.

Some of those efforts also include trying to offload some of its mortgage loan exposure, as well as the sale of it recreational vehicle loan book, according to a recent Bloomberg report.

These efforts highlight the contrary nature of growing a bank too fast in America, as the weight of regulatory scrutiny could upend what would typically be a growth plan cheered on by Wall Street.

And perhaps that's OK when considering the economic turmoil this country went through in part because of relaxed regulations towards the financial sector leading up to the 2008 Great Recession. But for investors, it highlights the risk of investing in the banking sector.

"The case underpins a core principle of banking that may seem counterintuitive beyond: In banking, growth is … not good," Rubinstein said. "It's a lesson financial institutions learn again and again, across diverse sources of growth."