Two Democratic senators asked acting Comptroller of the Currency Michael Hsu in a letter Monday why his office approved the merger between Flagstar and New York Community Bank while the Federal Deposit Insurance Corp. didn’t.
Sens. Elizabeth Warren of Massachusetts and Richard Blumenthal of Connecticut cited an October 2022 Capitol Forum article that quoted an anonymous FDIC source as saying “no one” at the agency “was comfortable recommending approval for a merger” between the two banks. In its investigation into the potential partnership, the FDIC flagged Flagstar’s missteps in fair lending and NYCB’s exposure to multifamily lending, Reuters noted in an article last month.
NYCB and Flagstar first proposed their combination in April 2021, but “after a year passed with no FDIC movement,” the banks “made plans to restructure their merger so that it no longer required FDIC approval,” Warren and Blumenthal wrote on Monday.
NYCB and Flagstar proposed a transition in April 2022 Flagstar’s federally chartered subsidiary of the State Savings Bank into a national banking association, after which NYCB’s state-chartered subsidiary was merged into the national bank.
The banks said in a news release at the time that a national bank charter was “appropriate” for the combined entity because the Office of the Comptroller of the Coin had regulated Flagstar’s national mortgage banking business for years.
The OCC approved the partnership in October 2022, calling the charter change a “business decision” and adding “Charter preference is not a legally relevant consideration under the [Bank Merger Act].”
Warren and Blumenthal are urging Hsu to tell them by May 15 what risks the OCC recognized in approving the merger, and whether the agency consulted with the FDIC before greenlighting the deal. According to Reuters, the OCC had its own concerns about NYCB’s commercial real estate exposure, but pulled the trigger on the idea that Flagstar’s assets would diversify NYCB’s loan portfolio.
In Monday’s letter, Warren and Blumenthal said their doubts about the NYCB-Flagstar partnership will hardly end in October 2022 — and that the FDIC did not escape a reprimand. Both the OCC and the FDIC approved NYCB’s acquisition of a significant portion of the failed Signature Bank’s assets in March 2023, just six months after the OCC greenlighted the Flagstar transaction, the senators noted.
The move pushed NYCB’s asset totals above the $100 billion threshold, leading to increased scrutiny and requiring the bank to keep more capital in reserve.
“These two hasty, approved mergers created serious risks for NYCB,” the senators wrote Monday, referring to the Flagstar and Signature transactions.
The surprising loss
NYCB’s financial health was called into question in January, when the bank announced a $252 million loss on its CRE exposure and cut its quarterly dividend by 70%. The announcement sent NYCB’s stock price into a tailspin that continued — despite a CEO change — until the bank received a $1.05 billion capital infusion from new investors, who brought in yet another CEO (who coincidentally led the OCC before Hsu) .
The cash injection “appears to be stabilizing, at least for now,” NYCB, Warren and Blumenthal wrote. But senators on Monday took issue with the OCC’s perceived lack of oversight of NYCB between the Signature transaction and the January stumbles.
“NYCB had nine months before January to prepare for the new capital requirements,” the senators wrote. “While NYCB experienced internal instability, the OCC seemed to be asleep at the wheel.”
As a condition of approving the Flagstar merger, the OCC required NYCB to have its dividends paid by the agency for two years after the transaction. The dividends were allowed as long as the OCC did not object.
The senators asked Hsu on Monday at what point the OCC noticed that NYCB was struggling to adapt to the higher capital requirements and, further, why the agency took until the fourth quarter of 2023 to pressure the bank to maintain its dividend. to lower.
“The OCC allowed NYCB to engage in two risky mergers in a six-month period, and then failed to address NYCB’s risks until the walls were about to collapse,” Warren and Blumenthal wrote. “The regulators promised to do better, but the near collapse of NYCB in early 2024 signaled that the OCC has once again abdicated its oversight responsibilities.”
OCC not in the lead
Monday’s letter comes less than a month after the FDIC proposed an intensified investigation into bank mergers. Deals that create banks with more than $100 billion in assets could face an increased focus from regulators on financial stability, according to the proposal.
But while U.S. financial regulators have generally had a come-to-Jesus moment on supervision in the wake of last year’s bank failures, it should be noted that the OCC is not the lead agency in any of these areas been. the three most important post-mortem reports: the Federal Reserve wrote the report on Silicon Valley Bank, and the FDIC wrote the reports on Signature and First Republic.
Warren and Blumenthal asked Hsu on Monday how the OCC has changed its oversight and investigative practices since the SVB and Signature failures.
For his part, Hsu has not been silent. In a speech in January said He said regulators should not view mergers as yes/no propositions.
“The question is not whether we should do that or not,” Hsu told Reuters. “The question is: how do we get the best [mergers]?’”
Wait, the CFPB?
In one respect, the senators’ letter acts as a plug for a bill Warren introduced in 2021 that would turn the Consumer Financial Protection Bureau into a kind of “backstop,” requiring the agency to review all bank mergers involving consumer products and services , review and approve. In addition, it requires that discussions between regulators and the merging institutions be made public before the merger application is submitted.
“This bill would have helped the public understand why the FDIC did not approve the original merger, and why the OCC approved the merger without addressing the FDIC’s concerns,” the senators wrote Monday.
Even if such a measure were implemented, the CFPB itself faces a serious challenge to its authority. The Supreme Court will rule this year in a case questioning the constitutionality of the agency’s funding. If the court rules in favor of the plaintiffs, it could lead to the undoing of more than a decade of regulations.
As it stands, Warren and Blumenthal Hsu asked Monday about the OCC’s level of communication with other regulators — when the agency was aware of the “material weaknesses” NYCB disclosed last month, and when the OCC specifically targeted the Securities and Exchange Commission.
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