As the one-year anniversary of the collapse of Silicon Valley Bank approaches, alarms are ringing once again across the American banking landscape.

On January 31, local time, New York Community Bank reported a staggering $252 million loss in the fourth quarter of last year, sharply contrasting with market expectations of a $206 million profit.

At one point during the day, the bank’s stock plummeted by 46%, leading to a trading halt, and it ultimately closed down by 38%.

The dramatic fall of New York Community Bank triggered a widespread decline in regional bank stocks in the United States

The Dow Jones Regional Bank Index (KBW) dropped by 8% over two days, marking its largest decline since the onset of the banking crisis in March 2023.

Interestingly, New York Community Bank was a key player in the previous banking crisis, having taken over Signature Bank, which also collapsed last year.

Strikingly, just a day before New York Community Bank's stocks took a hit, the Federal Reserve omitted the phrase “the U.Sbanking system is sound and resilient” from its statement, raising concerns about the stability of the banking sector.

The Bank Term Funding Program (BTFP), designed to rescue U.S

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banks last year, is set to expire on March 11. Meanwhile, the Fed’s reverse repurchase agreements are being quickly depleted, nearing zeroThe liquidity crisis among U.Sregional banks is imminent.

Interestingly, at the end of last year, JPMorgan Chase's chairman and CEO made headlines by selling off his family’s shares, a move perceived by many as a desire to cash out.

As the anniversary of the banking crisis approaches—one that resulted in the collapse of three major U.Sregional banks and the emergency takeover of Credit Suisse in Europe—new fears are extending from the U.Sto Japan, Switzerland, and Germany.

The dramatic losses at New York Community Bank can largely be attributed to two loans tied to commercial real estate that turned into bad debts

The bank sustained significant losses and set aside over $500 million for loan loss provisions, a figure that exceeded analysts' expectations by tenfold, dwarfing the $62 million set aside in the previous quarter.

To ensure ample liquidity to meet U.Sregulatory requirements, the bank was forced to cut its dividend by 70%, reducing the payout from $0.17 per share to $0.05.

These alarming reports of losses and dividend cuts sent shockwaves through the investor community.

On January 31, New York Community Bank experienced a historic drop of 38% in a single day, wiping out all gains since it acquired Signature Bank

The following day, the decline continued with the bank plummeting over 11% to its lowest level since 2000.

The KBW index also fell sharply, declining by 8% over two days, marking its biggest drop since the banking crisis began in March 2023.

In March 2023, following the rapid collapse of three regional banks over five days, U.Sbanking regulators urgently amended capital regulations, marking the most significant revision in over a decade.

In July 2023, mainstream financial regulators—including the Federal Reserve, FDIC, and Office of the Comptroller of the Currency—released a much-anticipated proposal for the U.S

Basel III endgame rules.

According to the proposal, the asset threshold for strictly regulated banks was reduced from $250 billion to $100 billion—larger banks exceeding $100 billion in assets may need to boost their capital by around 16% to comply with more stringent capital requirements.

The proposal also requires all large bank institutions to reflect unrealized gains and losses on available-for-sale securities in their regulatory capital.

Under current U.S

capital regulation rules, third-category banks (with total assets exceeding $250 billion) and fourth-category banks (with total assets between $100 billion and $250 billion) can choose not to reflect unrealized gains and losses on available-for-sale securities in their regulatory capitalSilicon Valley Bank, belonging to the fourth category, had previously made such choices.

In March 2023, New York Community Bank took over the failed Signature Bank, pushing its asset level past the $100 billion markThis means that the bank is now subject to stricter regulatory requirements, necessitating higher capital reserves and allowances for losses.

Currently, Moody's has indicated that it will downgrade all assessments of New York Community Bank, with the possibility of its credit rating falling into junk status.

The unexpected disastrous financial report from New York Community Bank has shed light on a new round of crisis affecting the $560 billion commercial mortgage market.

According to the Mortgage Bankers Association, hundreds of large office buildings across the U.S

have commercial mortgage loans set to expire this year, with a total value of $117 billion.

Data from Trepp reveals that by the end of 2025, U.Sbanks will face approximately $560 billion in commercial real estate debt maturities, accounting for over half of the total real estate debt maturing during the same period.

Unlike residential loans, commercial mortgages in the U.Sare primarily interest-only loans, which means that upon maturity, a large sum equivalent to the original loan amount is due.

Many of these commercial mortgages were signed ten years ago when interest rates were lower than current levels, and now the rates on commercial mortgages have nearly doubled.

Property owners may struggle to refinance in the current high-interest environment, and a significant portion of U.S

commercial real estate faces challenges in making repayments or refinancing, which could further ignite the banking crisis.

Analysts have pointed out that the U.Scommercial real estate market is experiencing one of the most severe downturns since World War IIAmerican economists have discovered that 40% of office loans on banks' balance sheets are underwater, which could pose significant risks for numerous regional banks holding these loans.

Indeed, due to rising interest rates, economic uncertainty, and the trend toward remote work, overdue commercial real estate loans have reached their highest level in a decade.

The International Monetary Fund (IMF) has issued warnings that the U.S

commercial real estate market faces serious risks, currently in the deepest downturn it has experienced in half a centurySince the Fed initiated its interest rate hikes in March 2022, U.Scommercial real estate prices have dropped over 11%, wiping out all gains from the previous two years, with this decline significantly exceeding the impacts of previous rate hike cycles.

The IMF emphasizes that financial regulators must remain vigilantWith rising delinquency and default rates, lending could become restricted, leading to a vicious cycle: tighter financing conditions, further declines in commercial real estate prices, damage to financial intermediaries, with eventual spillover effects on other areas of the economy.

"Compared to the forthcoming defaults expected in 2024 and 2025, the current delinquency figures reported by banks are merely a drop in the bucket

The banks are still facing significant risks, and the anticipated decline in interest rates will not alleviate their issues," warns David Aviram, head of private fund Maverick Real Estate Partners, which specializes in commercial real estate lending.

The deterioration of the U.Sreal estate market is not just contained within its borders; it has begun to ripple into Asia and Europe.

On February 1, Aozora Bank in Tokyo, Japan, announced it expected to incur a net loss of 28 billion yen (approximately 1.36 billion RMB) for the fiscal year ending in March due to losses related to U.S

commercial real estate, marking the first quarterly loss in 15 years, previously anticipating a profit of 24 billion yenThe bank's president and CEO is set to retire on April 1.

In response to this announcement, Aozora Bank's stock fell 21.49% on the same dayPrior to the announcement, the bank's stock had been hovering near a five-year peak.

Aozora Bank reportedly holds a balance of $1.9 billion in U.S

office loans, accounting for 6.6% of its total loan portfolioThe bank cautioned that the U.Soffice market may take two years to stabilize.

On the same day in Europe, Deutsche Bank, Germany's largest bank, disclosed that provisions for losses related to U.Scommercial real estate had increased more than fourfold in the fourth quarter of 2023. The bank set aside €123 million for its related portfolio, significantly up from €26 million in the same period in 2022, nearly double the provisions from the third quarter of 2023.

Concerns about real estate are not confined to the U.S.

On February 1, Credit Suisse Group announced that it would set aside nearly $700 million in loss provisions related to loans made to Austrian private real estate company Signa Group, causing profits to plummet by more than 50%. The significant loss also triggered the resignation of its CEO.

At the Davos Forum last month, Guggenheim's chief investment officer, Anne Walsh, pointed out that the pain in the commercial real estate sector, particularly in the office space, is just beginning

"Small and mid-sized banks will face a massive refinancing of office loans over the next 24 monthsThis situation can be seen as a rolling recession in the banking sector that may last for some time."

The BTFP, or Bank Term Funding Program, was a new emergency tool rolled out by the Fed during the regional banking crisis sparked by the collapse of Silicon Valley Bank in 2023. At the time, BTFP was interpreted by Wall Street as a form of quantitative easing (QE).

In simple terms, it allowed the Federal Reserve, acting as the "lender of last resort," to permit commercial banks to collateralize U.S

Treasury and agency bonds at par value, borrowing funds for up to a year, ensuring banks had sufficient liquidity to withstand withdrawals.

When banks face withdrawals, they often sell their most liquid assets, like Treasuries, to raise cash for depositorsThe market price of Treasuries is inversely related to market interest rates, meaning when market interest rates rise, the market price of Treasuries falls.

Consequently, after the Fed began its rate hike cycle in March 2022, the value of the Treasury assets held by the banking sector continuously eroded, leading to paper losses

When Silicon Valley Bank faced a run on deposits, it was forced to sell Treasuries at a loss to free up cash, turning paper losses into real losses.

The BTFP mechanism allowed the Fed to value collateral securities at par rather than at market value for loan operations.

Under the BTFP, a bank could collateralize a bond valued at $80 in the market to borrow $100 from the Federal Reserve Bank

In contrast, through the discount window, an $80 bond would only secure an $80 loan.

Not surprisingly, this mechanism successfully bolstered the capital balance sheets of the entire banking system, preventing a potential crisis from escalating.

However, the situation took a turn against the Fed's intentions as BTFP morphed into a method for banks to make money passively.

Since its inception in March last year, the utilization of this tool surged rapidly to about $100 billion within the first few months, stabilizing at that level afterward.

However, as the aftershocks of the banking crisis began to fade, usage of the BTFP actually increased—it surged significantly starting in November 2023. As of the week ending January 17, 2024, the balance of this tool reached a record high of $161.5 billion.

Before the launch of BTFP, the Fed had considered the discount window as a long-term solution for banks' liquidity needs

In the week ending January 17, the utilization of the discount window was only $2.3 billion, dramatically lower than the historical peak of $153 billion set in March last year.

The surge in BTFP utilization is not indicative of a renewed liquidity shortfall within the banking sector; rather, it's a reflection of the market discovering a significant arbitrage opportunity between BTFP and the federal funds rate.

The initial BTFP rate was set based on the one-year market rate plus a 10 basis point premium

The one-year market rate is predicated on expectations of the Fed's policy rates over the next yearAs investors anticipate significant rate cuts from the Fed, the current borrowing cost is only 4.8%—with the market betting on a policy rate of approximately 4.8% within a year, lower than the currently set 5.5% Fed benchmark rate.

A rather peculiar situation arises—where the interest rate paid on deposits by the Fed is higher than the interest rate charged for loans.

Financial institutions are able to borrow at low rates through BTFP and subsequently lend at higher rates in the federal funds market, creating a risk-free arbitrage opportunity.

On January 12, JPMorgan Chase announced record net interest income for the seventh consecutive quarter.

On January 24, the Fed announced an increase in BTFP rates, which will now be “no lower than” the effective interest rate on reserve balances on the date of the loan issuance

This means arbitrage opportunities are effectively eliminated.

The Fed also stated that this temporary tool will proceed as originally planned to end on March 11, ceasing new loan issuanceBanks and other depository institutions will need to rely on the discount window to meet liquidity needs.

The expiration of BTFP, alongside rising repo rates and the swift depletion of overnight reverse repurchase agreements, suggests that liquidity risks may soon become concentrated.

Not only are regional banks facing crisis, but large U.S

banks also find themselves in a perilous situationEven the massive interest margin that the Fed provided could not prevent declines in performance among large Wall Street banks.

Recently released financial reports for the fourth quarter of last year indicate that the big four—JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup—experienced declines in net profits both sequentially and year-on-year.

JPMorgan reported a net profit of $9.307 billion in the quarter, marking decreases of 29% and 15% compared to the previous quarter and the same quarter last year, respectively; Bank of America posted a net profit of $3.144 billion for the quarter, down 59.7% and 55.92% quarter-on-quarter and year-on-year; Citigroup reported a net loss of $1.839 billion in the quarter, flipping to a loss from profit in the previous quarter; and Wells Fargo reported a net profit of $3.446 billion, down 40% quarter-on-quarter.

These financial results not only missed analysts' expectations but also reflect a significant erosion in the overall profitability of the industry.

The increasing pressure to build up loan loss provisions and a reduction in interest income were direct reasons behind the decline in bank performance

With borrowers defaulting more frequently, banks are forced to raise their loan loss provisions to account for potential losses, which directly impacts their net profits.

At the same time, major Wall Street banks are still bearing the costs from last year’s banking crisis among regional players.

The FDIC incurred around $23 billion to clean up the mess left behind by these failures, mandating that large banks with total assets over $50 billion cover 95% of the losses to the insurance fund

JPMorgan paid $2.9 billion, Bank of America paid $2.1 billion, Citigroup paid $1.7 billion, and Wells Fargo paid $1.9 billion.

Last year, the banking sector in the United States was hit hard by job cutsAs income stagnated, banks such as Wells Fargo and Goldman Sachs have initiated a wave of layoffs to lower costs.

Recently, Citigroup announced plans to lay off around 20,000 employees by the end of 2026, representing approximately 10% of its workforce, coinciding with a dismal quarterly performance, marking its worst in over a decade.

In the early hours of February 1, the Fed once again remained inactive during its first policy meeting of 2024, dousing any hopes for a rate cut as early as March.

This is not good news for the banking sector.

The root of the current agony for regional banks is deeply entrenched in commercial real estate

Given that commercial real estate loans typically have a term of 5-10 years, much of the debt coming due soon was issued during a period of high prices and low interest ratesThe longer the Fed maintains its interest rate schedule without a cut, the more property owners will struggle with the burden of "taking new loans to repay old debts."

Moreover, a systemic impact arises as elevated interest rates lead to U.Sbanks experiencing more inflows and fewer outflows.

In terms of liquidity inflows, the value of assets such as bonds held by U.S

banks has significantly diminished due to interest rate hikesAt the same time, rising rates have led to a loss of many bank deposits.

On the outflow side, higher interest rates have raised operational costs for U.SbanksBanks now need to pay more interest on deposits to attract and retain customers.

In the wake of New York Community Bank's financial report, more interest-sensitive U.S

two-year Treasury yields experienced a sharp 15 basis point drop, while the ten-year Treasury yields rapidly fell by 10 basis points.

On February 1, U.Sbank stocks fell for the second consecutive day, reigniting fears of a resurgence of the banking crisis, with traders anticipating the Fed will accelerate its pace of rate cutsSwap contracts indicated a slightly increased likelihood of a March rate cut.

This comes just a day after Powell dampened expectations for a rate cut.

The logic behind this is simple: if regional banks and U.S

commercial real estate sectors experience crises, the Fed will have no choice but to intervene and provide support.

Analysts have flagged that if the Fed does not take measures to reduce quantitative tightening or cut rates in the upcoming March FOMC meeting, a massive sell-off in the bond market could occur, leading to increased losses on the banks' balance sheets from held-to-maturity securitiesThis could compel depositors to shift towards money market funds in pursuit of higher interest rates, putting pressure on banks to repay depositorsIf this transpires, and without support from the BTFP, banks would need to rely on the discount window for loans at market prices, which would decline as bond prices fall, possibly resulting in insolvency due to unrealized losses.