Some deposits at New York Commercial Bank may be at risk after Moody's downgraded its rating again

A downgrade could trigger contractual obligations from New York Commercial Bank's business clients that require the bank to maintain an investment-grade deposit rating, according to analysts who track the company. (Consumer deposits at FDIC-insured banks are covered up to $250,000.)

The New York bank finds itself in a stock free fall that began a month ago when it reported a surprise fourth-quarter loss and steeper provisions for loan losses. Concerns increased last week after the bank's new management found “material weaknesses” in the way it reviewed its commercial loans. The bank's shares have fallen 73% this year, including a 23% drop on Monday, and shares now trade at less than $3 per share.

Among the matters of interest to analysts and investors is the status of New York Mercantile Bank deposits. Last month, the bank said it had deposits worth $83 billion as of February 5, 72% of which were insured or guaranteed. But those numbers date back to the day before Moody's began downgrading the bank's ratings, sparking speculation about possible deposit flight since then.

Moody's downgrades could affect funds in at least two areas: its “banking as a service” business with $7.8 billion in deposits as of a regulatory decision in May. Depositand a mortgage guarantee unit with deposits ranging between $6 billion and $8 billion.

“There is a potential risk to deposit servicing in the event of a credit rating downgrade,” Citigroup analyst Keith Horowitz said in a February 4 research note. Bank of New York executives told Horowitz that its deposit rating, which Moody's pegged at A3 at the time, would have to fall four notches before it would be at risk. It has fallen six degrees since that note was published.

During a conference call on February 7, Bank of New York's CFO John Pinto He stressed that the bank's mortgage guarantee business needed to maintain its investment-grade status, and said that deposit levels in the unit ranged between $6 billion and $8 billion.

“If there is a contract with these depositors that should be investment grade, in theory that would be a dramatic event,” Chris McGroty, an analyst at KBW, said of Moody's downgrade.

NYCB did not immediately return calls or email seeking comment.

It is not possible to determine what the contracts force the New York City Bank to do in the event of a violation of investment grade status, or whether a downgrade from multiple rating companies would be needed to trigger the contractual provisions.

To replace deposits, the New York central bank could raise brokered deposits, issue new debt or borrow from Federal Reserve facilities, but all of that would likely come at a higher cost, McGroty said.

“They will do whatever it takes to keep deposits at home, but as this scenario continues, financing the balance sheet may become more expensive,” McGroty said.

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