U.S. regulators greenlit NYCB’s rapid expansion, despite multiple red flags
New York Community Bank’s financial woes could have been warded off had a banking regulator stopped it from pursuing a deal instead of approving it; OCC approved NYCB’s $2.6 billion merger with mortgage lender Flagstar Bank though other regulators feare
U.S. banking regulator could have stopped New York Community Bank from pursuing a deal that has contributed to its financial woes. Instead, they signed off on it.
The Office of the Comptroller of the Currency (OCC) approved NYCB’s $2.6 billion merger with Michigan mortgage lender Flagstar Bank even though other regulators feared the deal could create problems at the New York bank, according to people with knowledge of the matter and public records. When approving the deal, the OCC had concerns about NYCB’s big exposure to the ailing commercial real estate (CRE) sector, but believed that the tieup would help diversify its loan book, according to one person with knowledge of the matter.
The merger pushed the combined bank near a $100 billion regulatory threshold which imposes stiff capital rules. The looming new requirements, along with the bank’s CRE exposure, forced NYCB to slash its dividend in January, sending its shares diving and sparking credit downgrades.
Flagstar also had CRE
Aexposure. Reuters reported in May both banks were among the top five most exposed, when ranked by a regulatory concentration measure.
A year after SVB fiasco
Regulators’ deliberations reported here for the first time are surfacing a year after Silicon Valley Bank’s implosion exposed areas of weak oversight and as policymakers debate the risks of bank mergers. They help shed light on the missteps that contributed to NYCB’s problems and are likely to increase pressure on regulators to be tougher on bank tieups.
Interviews with a dozen industry officials, merger experts and regulatory sources, as well as public documents, show how
NYCB for years wanted to grow by pulling off a major deal, but when the Federal Deposit Insurance Corporation (FDIC) stood in its way the bank turned to the OCC.
The OCC greenlit the deal even though the FDIC had already privately vetoed the transaction over concerns about the banks’ lending practices, according to two of the sources.
Additionally, the OCC disclosed when approving the deal that it was in the middle of an examination into potential discriminatory lending at Flagstar. Reuters could not ascertain the outcome of that exam.
As a safeguard, the OCC imposed a special condition that required the bank to seek its written approval for future dividend payouts.
With NYCB, now fighting to shore up its balance sheet, approving the Flagstar deal looks to have been a miscalculation, say some regulatory and merger experts.
NYCB last week disclosed a far greater loss than previously stated as well as faults in its lending controls. But on Wednesday, it said it had raised $1 billion from investors.
“If you’ve got a banking problem, the solution is not to make it bigger,” said Dennis Kelleher, CEO of Washington advocacy group Better Markets that has analysed the deal.
“The FlagstarNYCB merger should never have been allowed...on the merits at the time.”
A spokesperson for NYCB did not provide comment. However, both banks filed a detailed merger application which the OCC spent several months reviewing, records show.
Rapid growth and pain
Founded in 1859, NYCB for decades chugged along as a small lender focused on New York real estate. But the bank wanted to accumulate deposits to generate more interest income, according to one person with direct knowledge of the matter who spoke on the condition of anonymity.
To grow deposits, former CEO Joseph Ficalora was set on deals, the person said, but his attempt at a transformative tieup with Astoria Financial was scuttled by regulatory issues in 2016.
After Congress in 2018 relaxed rules for banks with between $50 billion and $250 billion in assets, it became easier to get bank deals done.
Then in April 2021, under CEO Thomas Cangemi,
NYCB announced its big move: merging Flagstar into NYCB’s New York subsidiary, creating a lender with $87 billion in assets. Mr. Cangemi stepped down as CEO last month.
The deal had from the start.
NYCB was supervised by the New York Department of Financial Services (NYDFS) and the FDIC. Both regulators, as well as the Federal Reserve, had to review the deal. issues
FDIC red flagged deal
NYDFS approved the deal in April 2022. But officials at the FDIC had concerns about fair lending practices at Flagstar, and were also worried about the exposure of some of NYCB’s multifamily loans, according to sources familiar with the matter. FDIC officials decided they could not clear the deal, they said, speaking on the condition of anonymity.
Before the FDIC could formally block the deal, the banks announced in April 2022 they were restructuring the transaction so that NYCB would merge into Flagstar, which was regulated by the OCC. A national OCC charter was appropriate, the banks said.
As a result, the OCC and Federal Reserve had to review the deal, while the FDIC’s approval was no longer necessary and the NYDFS would have no oversight of the new entity.
The FlagstarNYCB merger should never have been allowed... on the merits at the time DENNIS KELLEHER CEO, Better Markets