Flagstar and Zions Bancorp among those with dangerous levels of CRE exposure
A growing number of banks face heightened failure risks due to excessive exposure to commercial real estate loans repricing at higher interest rates, according to an analysis from Florida Atlantic University.
The study found that 67 of the largest US banks have commercial real estate (CRE) loans exceeding 300% of their total equity capital, based on the latest quarterly data—a level regulators view as excessively risky.
“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, a finance professor at FAU’s College of Business. “With commercial properties selling at serious discounts in the current market, banks will eventually be forced by regulators to write down those exposures.”
The analysis screened the 157 biggest banks with over $10 billion in assets. It used public government data to calculate each bank’s total CRE exposure as a percentage of equity.
Flagstar Bank and Zions Bancorporation faced the highest risks, according to the screener. Flagstar’s $51 billion CRE portfolio comprised 553% of its $9.3 billion equity. For Zions, the $26 billion CRE book was 440% of its $5.8 billion equity.
“These are the two largest banks with excessive CRE exposure,” Cole said. “Both rely heavily on uninsured deposits, making them vulnerable to bank runs like those that felled three big lenders last spring and raised systemic stability concerns.”
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The industry average CRE exposure was just 139% of equity in Q1 2024. But among all US banks, 1,871 exceeded the 300% threshold, with 243 over 600%.
“Should another bank fail, depositors may pull money from these highly exposed banks, potentially triggering a banking panic reminiscent of last year,” Cole warned.
The risks stem from the repricing of CRE loans at higher rates as the real estate cycle turns, leaving banks holding mortgages and construction loans that are underwater compared to plunging property values.
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