Shares of New York Community Bank are plummeting, down 24% today so far. NYCB is in serious trouble, but it’s highly unlikely to spark another banking crisis.

The stock is tanking because NYCB discovered “material weaknesses” in tracking loan risks and replaced its CEO late last night. It’s been a bad year for the bank— shares are down 65% year to date.

But this is not another Silicon Valley Bank. The reason’s for NYCB’s troubles are highly specific to New York City and unlikely to effect many other banks.

Where NYCB’s Bad Loans Came From

NYCB’s problems stem from bad loans for multifamily buildings in NYC. About half of its loans are for rent-regulated buildings, according to Bloomberg.

This is a problem because New York City made a huge change to its rent laws in 2019. The new law is very complex, but the upshot is that it’s way harder to raise rents now than before.

This may be good for tenants, but it’s not great for landlords.

Faced with less rent than they expected, landlords may struggle to repay the loan on the building. And that could spell huge losses for NYCB.

NYCB acquired many of its loans from Signature Bank when Signature failed last year. The problems at NYCB are in part a ripple from the crisis last March.

A good friend of mine is a commercial real estate broker in NYC and sells a lot of multifamily buildings. He tells me the value of those buildings is way down since the rent law change.

Do Startups Need to Worry About This?

Founders are busy, so I’ll make this short: no.

This situation is not like what happened last year with SVB.

NYCB’s problems are specific to rent law changes in New York City. Other banks across the country should not be impacted, although more New York area community banks may be.

I’m glad this doesn’t look like a systemic problem — I don’t think I could go through that again any time soon!

One of my companies took a year to raise a big round of funding in 2022. And in March of ’23, every single dime of it was in SVB.

I remember nervously e-mailing back and forth with the founder one night on my way to a dinner with friends. I tried to give him the best info I could find on the crisis, since he was pretty busy running his company!

It all worked out. But it was a scary moment.

I don’t anticipate any repeat of last year’s drama this time.

Wrap-Up

NYCB looks like a disaster to me. But the disaster should be contained.

New York City is big, but only 2.6% of Americans live there. Whatever they do with their rent laws, it won’t impact the financial system much.

What do you think of the NYCB mess? Leave a comment and let us know!

Have a great weekend everybody!

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