T
he US banking system is facing a precarious situation due to growing exposures to commercial real estate and high interest rates, according to an analysis by a finance professor at Florida Atlantic University. Of the 158 largest banks in the country, 59 have commercial real estate exposures exceeding 300% of their total equity capital.

    Banks most vulnerable to these risks include Flagstar Bank, Zion Bancorp, Valley National Bank, Synovus Bank, Umpqua Bank, and Old National Bank, each with over $50 billion in assets. Regulators are pressuring banks to reduce their commercial real estate exposures, but restructuring loans has become a common practice.

    The "extending and pretending" strategy involves reworking loan terms to avoid signaling weakness to the market. However, this approach may not be sustainable as interest rates remain high. Troubled debt restructuring for commercial construction and multifamily mortgages has tripled since 2023, reaching $18 billion in the fourth quarter of 2024.

    According to data from the Federal Financial Institutions Examination Council, non-owner occupied nonfarm loans account for more than half of these troubled restructurings. The finance professor notes that banks are choosing to extend these loans, hoping interest rates will drop, but this is unlikely given current market conditions.

    The analysis reveals a concerning trend: among all banks, 1,788 have commercial real estate exposures greater than 300%, while 504 have exposures exceeding 500%. This highlights the need for banks to address their commercial real estate risks and develop more sustainable strategies.