A year ago, New York Community Bank was in a position of strength. Amid last year’s banking crisis, the bank’s subsidiary took control of $38 billion in assets from failed Signature Bank.

But this week, it was New York Community Bank that required a billion-dollar boost. Donald Trump’s former Treasury secretary, Steven Mnuchin, orchestrated the $1 billion investment after the troubled bank revealed material weaknesses in how it monitors loans.

NYCB’s crisis dates to earlier this year, when it admitted troubles with its commercial real estate exposure. The bank has since faced multiple credit downgrades. Customers pulled billions worth of deposits in the past month, but it’s far from a bank run.

In an interview with Straight Arrow News, former FDIC senior official Jim Watkins said NYCB is in a very different position than Silicon Valley Bank or Signature Bank, but that there are a lot of unique challenges facing the bank. Watkins, president of Secura/Isaac Group, discussed concerns about commercial real estate and whether banks are prepared.

This interview has been edited for length and clarity. You can watch the full interview in the video above.

Simone Del Rosario: This week one year ago, we were facing the Silicon Valley Bank collapse and the banking crisis that ensued. With NYCB, do you see this as another domino that could cascade into something greater?

Jim Watkins: So I think there are strong differences between what happened in Silicon Valley Bank and what we’re seeing unfold at New York Community Bank. With Silicon Valley Bank, there was an immediate, quick rush and run of depositors and a tremendous flow of funds out of the bank over a couple-day period, where it’s far more stable at New York Community Bank and they’ve been able to basically support the liquidity position of the institution. 

Simone Del Rosario: With this $1 billion in equity organized by Steve Mnuchin, is that the end of this for NYCB? Are they considered stable from here on out? 

Jim Watkins: I think time will tell. I think it’s an important move. It’s great to see private equity come into the scenario, and they’re bringing in real talent. Joseph Otting ran a bank before he served as the comptroller of the currency. He has a wonderful reputation in the banking community, very strong, forceful, former banker.

And of course, Steve Mnuchin, being the former Treasury secretary, has tremendous credentials. So he’s bringing in a sophisticated investor group, new members to the board, that should be able to address those issues.

But I think the issue of, can they continue to attract stable deposits, liquidity is something that they’ll have to address. They need to address some particular issues that are facing the institution, for example, the announcement of material weaknesses, those are fundamental risk management processes and controls and operational issues that the new management team will face.

And Joseph Otting out to be able to do that. He has that kind of background and experience as a former regulator. But there are a lot of challenges that the institution will face. And we’ll just have to see how that plays out over time.

Simone Del Rosario: Jim, one of the lines that we can draw between last year’s issues and this year’s is this broad concentration in a single area. With SVB, it was that venture capitalist-tech startup area. And with NYCB, it’s this exposure to commercial real estate. What’s going on in commercial real estate that could cause concern for banks that are heavily exposed?

Jim Watkins: So it’s important to note that New York Community Bank has had a longstanding concentration in commercial real estate. It was predominantly, for many years, focused on multifamily loans, which was considered a very stable, a regular revenue source. They do have office units as well, but generally speaking, in the past, the multifamily area has been more stable.

There is a new dynamic in New York, there were some changes in laws on rent-stabilized properties and more restrictions on that they’ll have to navigate through, but it’s an area that that is certainly getting a lot of attention. There’s a lot of concern by the regulatory community and management of concentrations, particularly commercial real estate.

So that’s something that Joseph Otting and his team will need to really focus in on and look at their controls and address this material weakness that was identified by the auditors

Simone Del Rosario: Broadening it out to these widespread concerns over commercial real estate – these empty office buildings and leases coming up – do you agree with Fed Chair Jerome Powell when he said that these are manageable risks during his testimony this week?

Jim Watkins: For most banks, I think that’s true. Certainly the largest institutions, they have a far more diversified mix of properties and a lot of certain financing also comes from insurance companies and non banks. So in general, I think it’s probably safe to say that commercial banks should be able to weather that now.

There’ll be a few that have specific concentrations in that particular category, but generally speaking, I would agree with Chairman Powell on that. I think most banks have been able to manage that. And it’s only one factor in this multi-phased area of commercial real estate lending.

Simone Del Rosario: Can we back up even more and explain what is happening with the commercial real estate area?

Jim Watkins: So in the office sector, I think there’s a lot of pressure. There’s a change, people are working from home as opposed to coming into the city center. So you do have a lot of pressure and there will be renewals of leases there, some companies are not needing as much space as they’ve had in the past.

Generally, what happens in a scenario where there are reductions is there’ll be less construction going forward, probably. And there will likely be, in certain markets, pressure on lowering lease prices. So I do expect that to play out. And entities that have a singular, heavy concentration solely in office space, that can be a tough, tough environment for some time.

Simone Del Rosario: What can banks do right now to decrease that exposure?

Jim Watkins: I think banks need to get their arm around what exactly is their exposure. When are the leases due? How is the cash flow? What are the stresses that could happen there? How vulnerable are their customers to reductions in rental rates?

And in most cases, we would expect the bank to already have a lot of this information. But if they don’t, they need to update their records, they need to be able to identify where the properties are located, what the underlying cash flow systems are of the properties, and get updated appraisals as needed.

Simone Del Rosario: What are regulators looking at this time?

Jim Watkins: Regulators are largely looking at the bank’s processes, controls and their risk management framework. Is there a good corporate governance, for example, that oversees any concentration in a bank’s operation, whether it’s on the funding side, whether it’s on the lending side?

Do they have the skill sets in management to address particular lending segments? Do they have workout groups? If in fact there’s going to be a pressure on certain segments, say, the office sector, does the bank have workout specialists that can restructure loans to mitigate risk, or if there are going to be losses, to have fewer losses and recognize those things be able to submit timely financial statements without material weaknesses?

So there’s an enormous process that goes behind the scenes. The banks need to make sure that they have these controls, these approaches, to really understand and stress their portfolios for certain events. I think there’s gonna be a lot of attention on this this year and probably next year.

Simone Del Rosario: And just as we started the interview talking about it being a year since last year’s banking crisis, there was so much talk at the time about how regulators could change things, how it could have been avoided. Where are we at in that process of addressing what happened a year ago?

Jim Watkins: It’s a big process. And I think regulators need to sit back and take a fresh look at how they’ve supervised some of their institutions. In the past, generally, what has happened is institutions that grew rapidly – and Silicon Valley is a good example – they grew rapidly and went over certain thresholds, like the $100 billion threshold.

Which is what we’re seeing in New York Community Bank, where it kind of grew rapidly in the last couple of years. It acquired some institutions. It acquired over $30 billion of the failed Signature Bank assets. So it grew above the $100 billion mark where the expectations rise on having stronger risk management and controls and capital levels and stress testing and liquidity management.

Institutions in the past that have grown rapidly can often outgrow the management capabilities. And we may see that being played out to some extent here at New York Community Bank. And so I think regulators need to take a fresh look at those lessons and the importance of strong liquidity management, funds management as well as asset controls and processes and underwriting.