Regional banks dipped after New York Community Bancorp took a surprise charge in its fourth-quarter earnings.

The concern is that other regional lenders may also be experiencing problems with loans made on commercial real estate. Two years of rapidly rising interest rates have driven down property prices and made it harder for banks’ clients to pay off loans. 

But the stock declines are modest by comparison to the 23% decline in NYCB’s share price on Friday. That suggests investors are more cautious than fearful that the problems NYCB is having could be widespread.

Though the Federal Reserve started raising interest rates in March 2022, the impact on commercial property loans has been a slow-burn issue for banks. A year ago, regional banks were hurt by a different issue: a sudden drop in the value of government bonds. That led to the collapse of Silicon Valley Bank, First Republic Bank, and Signature Bank.

The SPDR S&P Regional Banking ETF fell 1.3% on Friday. Valley National retreated 2.6%, and Bank OZK slipped 1.3%. Citizens Financial Group stock fell 0.8%, while shares of Zions Bancorp were down 1.4%. Regions Financial stock lost 0.4%.

Treasury Secretary Janet Yellen said last month that “regional banks have concentrations of commercial real estate lending” and “office properties in some cities are of special concern because vacancy rates have increased.” Yellen is chair of the Financial Stability Oversight Council.

Wedbush analyst David Chiaverini recognized NYCB’s problems early and downgraded the stock to a Sell last year. In a Friday note, he looked at other banks’ exposures to rent-regulated borrowers in New York. His table, reproduced below, shows that NYCB’s loan book is far more exposed than other lenders.

Some 22% of NYCB’s total loans are to buildings with at least one rent-regulated apartment, compared with 3.6% at Morristown, N.J.-based Valley National. The loans to buildings where all tenants are rent-regulated are smaller still. At NYCB, it’s 6%, while at Valley, it’s just 0.8%.

“NYCB’s problems are mostly idiosyncratic to itself, because of its outsize exposure to rent-regulated multifamily loans,” says Chiaverini. “But as long as interest rates remain elevated, commercial real estate will be a headwind to these banks, when their borrowers need to refinance.”

In NYCB’s home market of New York City, rent controls have stopped landlords from increasing income as much as they might have liked to cope with higher interest rates, or even to make needed repairs. NYCB also ran into issues when it had to raise its capital reserves because of new regulatory requirements triggered when it picked up assets from Signature Bank last year.