T
he US banking system is facing significant risks due to its exposure to commercial real estate, according to a finance professor at Florida Atlantic University. Of the 158 largest banks in the country, 59 have exposures greater than 300% of their total equity capital, as reported in the fourth quarter 2024 regulatory data. These banks are particularly vulnerable and include Flagstar Bank, Zion Bancorp, Valley National Bank, Synovus Bank, Umpqua Bank, and Old National Bank, each with over $50 billion in assets.

    Regulators have been urging banks to reduce their exposures, but doing so could send a signal of weakness to the market. As a result, many banks are "extending and pretending" by restructuring their loans rather than selling them off or writing down their value. This practice has led to a significant increase in troubled debt restructurings for commercial construction, multifamily, owner-occupied, and owner-non-occupied mortgages.

    According to data from the Federal Financial Institutions Examination Council (FFIEC), these restructurings have tripled since 2023, reaching $18 billion in the fourth quarter of 2024. While non-owner occupied nonfarm, non-residential accounts account for most of this amount, there is also a concerning trend in multifamily and commercial construction loans.

    Banks are choosing to extend these loans, hoping that interest rates will drop, but this is unlikely given current market conditions. Instead, they are restructuring the loans under the same terms from five years ago, which may not be sustainable in today's rate environment. The number of banks with total CRE exposures greater than 300% has increased significantly, with over 1,700 banks facing this level of risk.