This is more concerning than what happened last spring. The problem then was a handful of banks doing something they weren’t really supposed to be doing at all (buying a lot of long-dated bonds) and doing it stupidly (not protecting themselves from the financial hit of swiftly rising interest rates.) Not great, but easy enough to blame on greedy management and flat-footed regulators.

The banks in trouble now got there by doing exactly what they were supposed to do and doing it badly. We don’t need banks to own a lot of Treasury bonds — individuals can do that for themselves — but we do need them to finance New York City office buildings and solar farms and startup businesses.

Put another way, the banks that collapsed last spring mostly failed because the pandemic caused a lot of things to happen that had never happened before. Savings accounts swelled, inflation skyrocketed, and the U.S. Federal Reserve raised interest rates at a record pace. Silicon Valley Bank basically misjudged Fed Chair Jerome Powell.

But banks like NYCB are now teetering because they misjudged their own borrowers, and either made loans to businesses that weren’t creditworthy or didn’t charge them enough interest to compensate for the risk. That’s the basic job of a bank, and gives this turmoil a more uneasy flavor than last time.

One other note: There’s also a real risk of embarrassment here for regulators, who deemed NYCB strong enough to buy the remains of another failed bank last spring. For Moody’s to find “multi-faceted financial, risk-management and governance challenges” just a few months later isn’t a good look for regulators.

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