A Little More Regulatory Context on NYCB
Notes on the $100 billion threshold, the bank's discussions with the OCC, and the Signature and Flagstar acquisitions
For understandable reasons, some of the coverage of New York Community Bancorp has been relatively high level in its discussion of the regulatory specifics behind some recent developments. This post tries to add a little more context on four points.
1. The $100 Billion Threshold
Some of the actions NYCB took recently have been framed as the company seeking to position itself to comply with enhanced regulatory requirements. NYCB’s earnings release last month, for example, said it had “accelerated some necessary enhancements that come with being a $100 billion-plus Category IV bank.” This has been shorthanded in a few articles as NYCB having crossed a threshold that subjects it to stricter capital and liquidity rules.1 As shorthand, this works as an explanation, but there are some nuances.
Capital
Crossing the $100 billion asset threshold did not, on its own, change NYCB’s currently applicable minimum capital requirements. The risk based capital rules that apply to NYCB remain the same, as do the leverage capital rules.
Even so, crossing the $100 billion threshold is significant from a capital perspective in a few ways.
First, NYCB is now required to submit a capital plan annually to the Federal Reserve Board. This capital plan submission does not do anything to change NYCB’s minimum regulatory capital requirements, but it does give the Federal Reserve Board an opportunity to take a thorough look at the firm’s capital planning strategies and processes, both on their own terms and, as discussed below, compared to other organizations of a similar size.
Second, every other year,2 NYCB is now required to undergo a supervisory stress test which results in the assignment of a stress capital buffer (SCB) on top of the regulatory minimum CET1 capital requirement. Under current rules, the SCB replaces the otherwise applicable 2.5% capital conservation buffer. Because the SCB is floored at 2.5%, in a best case scenario NYCB would be no better off than under the rules that apply to smaller banks. In a worse (for NYCB) scenario, the company’s SCB could be higher than 2.5%, representing an increase compared to current requirements.
Third, and maybe most significantly, NYCB would, like all banking organizations with $100 billion or more in total assets, be subject to the U.S. banking regulators’ Basel Endgame rules if those rules are adopted as proposed.3
Liquidity
Crossing the $100 billion threshold does not subject NYCB to the Liquidity Coverage Ratio or Net Stable Funding Ratio. Under current rules, these standardized liquidity requirements generally apply only to firms with $250 billion or more in total assets.4
Crossing the $100 billion threshold does, however, subject a firm like NYCB to a requirement that it conduct a quarterly internal liquidity stress test (ILST). Results of that ILST are used to size a required liquidity buffer that the firm must maintain.
Specific details of how firms design (or are required by their regulators to design) their ILSTs are not public, but a trade group has reported that at least “some banks have been subject to supervisory pressure to change [their ILST] assumptions if they are not consistent with the LCR construct.”
Unlike the LCR and NSFR, results of the ILST are not publicly released, and the consequences of noncompliance are not always consistently enforced,5 but you can understand why NYCB, even in the absence (for now) of LCR and NSFR requirements for Category IV firms, felt it prudent to “add[] on-balance sheet liquidity as we prepare for the enhanced prudential standards that apply to banks with $100 billion or more in total assets.”6
Supervision
Less frequently mentioned in some of the news coverage, and less easy to quantify than changes in regulation, are the changes that may have come for NYCB due to changes in how the firm is supervised.
NYCB’s asset growth means it is now part of the Federal Reserve Board’s Large and Foreign Banking Organization supervisory portfolio of firms with $100 billion or more in total assets, rather than the Regional Banking Organization supervisory portfolio of firms with between $10 billion and $100 billion in total assets.
A fault Vice Chair for Supervision Michael Barr identified in his report on Silicon Valley Bank and its parent company SVBFG was the failure by SVBFG to be prepared for its transition to this enhanced LFBO supervisory environment, due in part to a supervisory team that did not want to be seen as “appear[ing] to pull forward large bank standards by applying them to smaller banks in light of policymaker directives.” A report by the Federal Reserve Board’s Inspector General on the failure of SVB similarly identified as an area for improvement the Board’s handling of how firms transition from the RBO portfolio to the LFBO portfolio. It thus seems reasonable to assume that any real or perceived leeway given to SVBFG in the course of its transition is much less likely to be available to NYCB.
One key feature of LFBO supervision compared to RBO supervision is a greater use of horizontal exams, described by the Board as “reviews [that] include a series of examinations focused on a single supervisory issue at several firms” and thereby “allow[] examiners to compare risk management practices at different firms, identify gaps in practices at specific firms, and promote sound practices across the industry.”
You can perhaps see some of the results of this (either reactively or proactively) in NYCB’s earnings press release:
With this in mind, during the fourth quarter, we took decisive actions to build capital, reinforce our balance sheet, strengthen our risk management processes, and better align ourselves with the relevant bank peers. We significantly built our reserve levels by recording a $552 million provision for loan losses, bringing our ACL coverage more in line with these peer banks.
. . .
While these necessary actions negatively impacted our fourth quarter results, we are confident they better align our larger organization with our new peers and provide a solid foundation going forward. We successfully grew into a $50 billion-plus bank in 2018, and we believe the actions we are taking now will make our transition to a $100 billion plus bank even more successful.
2. The OCC and the Dividend
The above discussion focused on the regulation of NYCB by the Federal Reserve Board in its role as supervisor of bank holding companies like NYCB. Public reports suggest that the Office of the Comptroller of the Currency has played an equally important role at the level of NYCB’s national bank subsidiary, Flagstar Bank, N.A.7
In particular, Bloomberg reported that “tense talks with,” and “mounting pressure” from, the OCC were key factors in NYCB’s decision to cut its dividend and increase its loan loss reserves.
One important note of context for this is that NYCB committed in connection with two previous acquisitions to give the OCC more of an explicit say in Flagstar Bank’s dividend practices than would otherwise be the case. First, in its order approving NYCB’s bank merger with Flagstar Bank in 2022, the OCC imposed this condition:
To ensure Flagstar NA has sufficiently allocated resources to address any supervisory issues that arise post-merger, for a period of two years from the merger consummation date, the Bank shall not declare or pay any dividend without receiving a prior written determination of no supervisory objection from the OCC. Any request submitted pursuant to this condition shall occur at least 30 days prior to the declaration date and certify that the proposed dividend is in compliance with applicable capital distribution requirements
Second, in its order approving Flagstar Bank’s acquisition of certain assets and liabilities of Signature Bank in 2023, the OCC imposed a substantially identical condition:
To ensure Acquirer has sufficiently allocated resources to address any supervisory issues that arise post-acquisition, for a period of two years from the purchase and assumption consummation date, Acquirer shall not declare or pay any dividend without receiving a prior written determination of no supervisory objection from the OCC. Any request submitted pursuant to this condition shall occur at least 30 days prior to the declaration date and certify that the proposed dividend complies with applicable capital distribution requirements.
One should be careful not to overstate the importance of these commitments. The OCC as a general matter has a significant amount of power to ask pointed questions or signal disapproval about a bank’s capital management and dividend plans, even without these sort of commitments. Still, these commitments are a change to the general rule that a national bank’s dividend decisions require formal OCC approval or non-objection only in limited circumstances,8 and it seems reasonable to conclude that the commitments provided the OCC with at least a bit of leverage over Flagstar Bank that the OCC would not otherwise have had.
3. The Signature Acquisition
NYCB won an auction conducted by the FDIC in March 2023 for certain assets and liabilities of Signature Bank. Given the growing pains NYCB has exhibited recently, this has led to questions about whether regulators should have allowed NYCB to emerge as the winner of that auction. For instance, in the Wall Street Journal yesterday:
Eric Rosengren, the former president of the Federal Reserve Bank of Boston, questioned why regulators approved NYCB’s bid for Signature in the first place. The deal put NYCB above $100 billion, a key regulatory threshold that subjects banks to stricter capital and liquidity standards.
“The time to worry about risk management for an institution going over $100 billion is before they go over $100 billion,” Rosengren said.
Although perhaps they are better directed to Congress,9 questions like these do not seem like unreasonable ones to ask.
At the same time, to really engage with this counterfactual, it is necessary to look at the other bids the FDIC received for Signature. At least as summarized here, it does not look like the world’s hottest auction. The FDIC received bids from:10
Centennial Bank in Conway, Arkansas, at the time11 a roughly $23 billion bank;
First Citizens Bank and Trust in Raleigh, North Carolina, at the time a roughly $109 billion asset bank12; and
Northeast Bank in Lewiston, Maine, at the time a roughly $3 billion asset bank.
Another important piece of context: at the end of 2021 First Citizens was a $58 billion bank; it then nearly doubled in size as the result of its acquisition of CIT when that acquisition closed in January 2022.
So even if the FDIC in connection with a failed bank auction was allowed to and did apply a rule that says you cannot buy a failed bank if buying that bank would cause you to grow too much too fast, it is not clear that any of the four banks that submitted bids for Signature would have passed that test, depending on what you mean by too much or too fast.
Of course, one might object that looking only at the banks that submitted bids jumps too far ahead in the process, and that the questions ought to focus earlier — for example, on the FDIC’s rules about who can and cannot bid for the assets of failed banks, the assistance that will or will not be offered to bidders, and so on. As with Mr. Rosengren’s comments, the point is not to argue that this sort of objection is unreasonable. These are just really tricky issues.
4. The Flagstar Acquisition
The questions discussed above about NYCB’s acquisition of Signature Bank merit attention, but perhaps even more interesting is the regulatory backstory to a different recent NYCB acquisition. Yesterday’s WSJ article again:
In 2021, NYCB announced the deal for Troy, Mich.-based Flagstar, which would bring a lot of loans to businesses. After several regulatory approval delays, the deal closed in December 2022.
The Journal article does not go into further detail about these regulatory approval delays, but the broad outlines of the story look like this.
NYCB and Flagstar began merger discussions in April 2019.13 Those initial discussions did not result in a deal, but discussions picked up again in January 2021 and the parties signed a merger agreement in April 2021.
Under the merger agreement as originally structured, the plan was for NYCB’s bank subsidiary, a New York state-chartered savings bank, to be the surviving entity in the bank merger. This meant that regulatory approval was required from, among other agencies, the FDIC. NYCB filed its application with the FDIC in May 2021.
In April 2022, with FDIC approval not having yet been received, NYCB and Flagstar changed course. The parties decided that Flagstar Bank should convert from a federal savings bank to a national bank, and that Flagstar, not NYCB, should be the surviving bank in the merger. This meant that regulatory approval from the FDIC was no longer necessary, and that approval was required from the OCC instead.
The OCC ultimately approved the transaction in October 2022. The OCC in its approval order acknowledged, without directly opining on, a concern raised by a commenter that the “initial application did not result in Federal Deposit Insurance Corporation (FDIC) approval.” The OCC similarly acknowledged, without directly opining on, Flagstar’s response to this commenter that “the choice to apply for a national bank charter is ultimately a business decision available to it under the existing legal framework governing the United States’ dual banking system and that the commenter’s preference of charters does not constitute a statutorily relevant consideration under the BMA.”
The FDIC’s specific objection to the NYCB-Flagstar transaction, if in fact it had an objection,14 has never been clear. And assuming the FDIC did object to the deal, my point here is not to say that the FDIC was right and the OCC was wrong, or vice versa. Instead, the point is that two of the U.S. federal banking regulators appear to have evaluated the same transaction under the same governing statute and came to opposite conclusions as to whether the transaction was consistent with approval.
See for instance articles in the Wall Street Journal and Financial Times.
This was one of the criticisms of the current regulatory regime in Vice Chair for Supervision Michael Barr’s report on SVB, particularly with respect to situations where (as with SVBFG), the every-other-year nature of the supervisory stress test for Category IV firms mean that it can be several years between the time a firm crosses the $100 billion threshold and the time it becomes subject to a supervisory stress test.
NYCB would also be subject to the agencies’ new long-term debt rules, if those rules are adopted as proposed.
U.S. GSIBs and firms in Category II are subject to full LCR and full NSFR requirements. Firms in Category III are subject to either full or reduced (85%) LCR and NSFR requirements, depending on the degree to which they rely on short-term wholesale funding. Firms in Category IV, like NYCB, are subject (in reduced, 70% form) to the LCR and NSFR only if their reliance on short-term wholesale funding exceeds a specified threshold, and NYCB (at least as of its most recent report for the quarter ended September 30, 2023) is well below that threshold.
All the above describes the current rules. The widely held understanding is that the U.S. banking regulators intend to propose to both apply standardized liquidity requirements to a broader range of firms and to modify (or add to) how those requirements work to take into account lessons learned from 2023.
The VCS Barr report on SVB stated that SVBFG “was apparently out of compliance with the Regulation YY 30-day liquidity buffer requirement.” The report also stated that it “would have been appropriate” for supervisors to have issued an MRIA directing the board and senior management to “immediately take action to remedy the ILST deficit.”
Quoting again from the earnings release.
This is not unique to NYCB among regional banks, but the bank subsidiary is really where all the action is. As of year-end 2023, NYCB had $116.32 in total consolidated assets, $116.26 billion of which were at Flagstar Bank (on a consolidated basis). Likewise, substantially all of the company’s $2.4 billion of net income was generated at the bank level.
For a more detailed technical discussion of the general rules on when the OCC’s prior approval is or is not required, see pages 14-15 here.
The law says the FDIC has to declare as the winner the bid that results in the least cost resolution to the Deposit Insurance Fund, without permitting the FDIC to take into account other factors.
Like the FDIC does in its summary, these banks are listed here in alphabetical order, and not necessarily in order of who came in second, or third, or whatever.
All the asset sizes in these bullets are as of December 31, 2022, the last quarterly call report date before the March 2023 auction.
First Citizens, though a losing bidder here, would go on to win the prolonged auction for SVB later in the month. SVB failed earlier than Signature, but the Signature auction was completed first as the first auction the FDIC tried to run for SVB was unsuccessful.
This is from the background of the merger section in the merger proxy the parties eventually filed.
The parties have consistently declined to comment on their discussions with the FDIC and have framed their decision as being not about a desire to avoid the FDIC but instead a determination that “where we're heading in the bank in the future [means] that the OCC charter is the way to go.”