The NYCB-Flagstar deal, now marred with financial challenges, faced a rocky start exacerbated by questionable regulatory decisions. Surprisingly, the Office of the Comptroller of the Currency (OCC) gave the green light to New York Community Bank’s (NYCB) $2.6 billion merger with Flagstar Bank, despite concerns from other regulators and a looming threat to NYCB’s financial stability.
Sources reveal that the OCC, while acknowledging worries about NYCB’s substantial exposure to the ailing commercial real estate (CRE) sector, believed the merger would diversify the bank’s loan portfolio. However, the repercussions were severe as the combined entity approached the $100 billion regulatory threshold, triggering stringent capital rules. This, coupled with NYCB’s existing CRE exposure, led to a January dividend slash, plunging share values, and credit downgrades.
The regulatory decision-making process surrounding the deal is now under scrutiny. While the OCC gave its approval, the Federal Deposit Insurance Corporation (FDIC) had privately vetoed the transaction due to concerns over lending practices. Even the OCC’s disclosure of an ongoing examination into potential discriminatory lending at Flagstar failed to hinder the deal’s progression.
NYCB’s ambition to grow through major deals was evident for years, with regulatory hurdles thwarting a transformative tie-up in 2016. When the FDIC posed obstacles to the Flagstar merger, NYCB turned to the OCC, eventually reshaping the deal to bypass FDIC approval.
Despite concerns from various regulators about fair lending practices at Flagstar and NYCB’s multifamily loan exposure, the OCC approved the deal in October 2022. Experts now question whether approving the Flagstar deal was a miscalculation, especially considering NYCB’s recent financial disclosures and struggles to shore up its balance sheet.
This unraveling narrative sheds light on the missteps and complexities surrounding the NYCB-Flagstar deal, raising broader questions about the regulatory landscape’s effectiveness in overseeing bank mergers. As the debate on the risks associated with such mergers intensifies, the NYCB case underscores the need for a reevaluation of regulatory approaches and a potential tightening of oversight.