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More Banks Risk Failure as CRE Loans Reprice

Florida Atlantic University analysts said Flagstar Bank and Zion Bancorporation are facing risks due to commercial real estate loans.

BOCA RATON, Fla. – More than 60 of the largest banks in the country are at increased risk of failure due to their commercial real estate (CRE) exposures, according to a data analysis from a finance expert at Florida Atlantic University.

Sixty-seven banks have exposure to commercial real estate greater than 300% of their total equity, as reported in their first quarter 2024 regulatory data and shown by the U.S. Banks’ Exposure to Risk from Commercial Real Estate screener.

“This is a very serious development for our banking system as commercial real estate loans are repricing in a high interest-rate environment,” said Rebel Cole, Ph.D., Lynn Eminent Scholar Chaired Professor of Finance in FAU’s College of Business. “With commercial properties selling at serious discounts in the current market, banks eventually are going to be forced by regulators to write down those exposures.”

The U.S. Banks’ Exposure to Risk from Real Estate screener, a part of the Banking Initiative at Florida Atlantic University, measures the risk to exposure from commercial real estate at the 157 largest banks in the country with more than $10 billion in total assets. Using publicly available data released 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 equity. Bank regulators view any ratio over 300% as excess exposure to CRE, which puts the bank at greater risk of failure.

The banks of greatest concern are Flagstar Bank and Zion Bancorporation, according to the screener. Flagstar Bank reported $113 billion in assets with a total CRE of $51 billion. The bank, however, only had $9.3 billion in total equity, making its total CRE exposure 553% of its total equity.

Similarly, Zion Bancorp had a total CRE of 440% of its total equity; the bank reported $87 billion in assets and total CRE of $26 billion, but only $5.8 billion in total equity.

“These are the two largest banks with excessive exposure to commercial real estate,” Cole said. “Both rely heavily on uninsured deposits, which makes them vulnerable to a bank run similar to what forced regulators to close three large banks during spring 2023. Those bank closures have led to concerns about the stability of the U.S. banking system that persist to today.”

For comparison, the Q1 2024 industry-average benchmark for total CRE exposure was 139% of total equity.

Banks with less than $10 billion in total assets are facing similar risks due to their commercial real estate exposure. Among banks of any size, 1,871 have total CRE exposures greater than 300%, 1,112 have exposures greater than 400%, 551 have exposures greater than 500% and 243 have exposures greater than 600%.

“Three banks have failed in the past year and now we have several candidates where their exposure to commercial real estate is over 500%. Should another bank fail, it’s likely that depositors will pull their money out of these highly exposed banks, which could lead to a banking panic similar to what we saw during spring 2023,” Cole said.

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