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For the banks, the pain started last year when because of rising rates, banks had to mark down the value of their bond and loan portfolios. Remember, when rates go up, the value of a bond goes down so those investments held by banks; the bonds and loans which for a bank, loans issued are bonds because they pay the fixed rate and regular coupon-like payments, those all took a hit last year and bank stocks crashed 45% in the first five months of the year.

What’s happening now is a little different but still related. Because of those higher rates and plunging property values, a lot of commercial property owners are just letting the banks have the property instead of refinancing. Higher rates have sunk cash flow on rents and drove property values lower so there’s just no point refinancing some of it, especially office space. Banks have been building up their loan loss reserves, the cash account they set aside for in cash loans default, but evidently not enough. New York Community Bancorp, NYCB, shocked everyone last week when it increased this cash reserve account by 345%, moving another $646 million into loan loss provisions from just $187 million in the prior quarter. Besides saying it might not be able to collect on that additional $646 million in loans, the bank also took a writedown of $185 million on two loans…saying it almost certainly wasn’t going to be able to collect.

The broader regional bank ETF, the KRE, sank almost 9% last week on the fear that this problem is going to extend to other banks and lead to another crash like last year.

But the problem at NYCB isn’t as bad across the entire sector and that could create opportunities if you know what to look for.

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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through dividend stocks, investing and ways to make more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.

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