More than 60 of the nation’s largest banks are at increased risk of failure due to their investments in commercial real estate (CRE), according to a data analysis by financial experts at Florida Atlantic University.
More than 60 of the nation’s largest banks are at increased risk of failure due to their investments in commercial real estate (CRE), according to a data analysis by financial experts at Florida Atlantic University.
As reported in first-quarter 2024 regulatory data and shown in the U.S. Bank Commercial Real Estate Risk Exposure Screener, 67 banks have commercial real estate exposure of more than 300% of their total capital.
“This is a very serious development for the banking system as interest rates on commercial real estate loans are re-evaluated in a high interest rate environment,” said Dr. Rebel Cole, Lynn Eminent Scholar and professor of finance in the FAU School of Business. “With commercial real estate selling at a significant discount in the current market, banks will ultimately be forced by regulators to write down those exposures.”
The U.S. Bank Real Estate Risk Screener, part of Florida Atlantic University’s Banking Initiative, measures commercial real estate risk for 157 of the nation’s largest banks with more than $10 billion in total assets. Using data published quarterly from the Federal Financial Institutions Examination Council Central Data Repository, Cole calculates each bank’s total CRE exposure as a percentage of the bank’s total capital. Bank regulators consider a ratio above 300% to be excessive exposure to CRE, increasing a bank’s risk of failure.
The banks of greatest concern, according to the screener, are Flagstar Bank and Zion Bancorporation. Flagstar Bank reports total assets of $113 billion and total CRE of $51 billion. However, the bank’s total capital is only $9.3 billion, making total CRE 553% of total capital.
Similarly, Zion Bancorp’s total CRE represents 440% of its total capitalization; the bank reports $87 billion in assets and $26 billion in total CRE, but only $5.8 billion in total capitalization.
“These are two large banks with excessive exposure to commercial real estate,” Cole said. “Both rely heavily on uninsured deposits, making them vulnerable to bank runs similar to the ones that forced regulators to close three large banks in the spring of 2023. These bank closures have led to concerns about the stability of the U.S. banking system that continue to this day.”
By comparison, the industry average benchmark for total CRE exposure in Q1 2024 was 139% of total capital.
Banks with less than $10 billion in total assets face similar risks from their exposure to commercial real estate: Among banks of all sizes, 1,871 have commercial real estate exposure greater than 300%, 1,112 have greater than 400%, 551 have greater than 500%, and 243 have greater than 600%.
“Three banks have failed in the past year and there are now multiple candidates with over 500% exposure to commercial real estate. If additional banks fail, depositors will likely pull their funds from these highly exposed banks, which could lead to a banking panic similar to that seen in the spring of 2023,” Cole said.
-FAU-