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  • Writer's pictureRealFacts Editorial Team

These Banks are Overexposed to CRE


Commercial real estate buildings

In American banking, 67 institutions have emerged as significantly overexposed to commercial real estate (CRE), posing a heightened risk of failure. Flagstar Bank and Zion Bancorporation are leading this precarious group, according to a recent analysis by a finance expert from Florida Atlantic University.


Flagstar Bank, with $113 billion in assets, holds $51 billion in CRE—a staggering 553% of its total equity, which stands at just $9.3 billion. Zion Bancorp exhibits similar vulnerability with $26 billion in CRE, translating to 440% of its $5.8 billion equity, despite its $87 billion in total assets.


Expert Warnings on CRE Exposure Risks


"These are the two largest banks with excessive exposure to commercial real estate," said Rebel Cole, a professor of finance at FAU's College of Business. Cole highlighted their reliance on uninsured deposits, which makes them particularly susceptible to bank runs. This risk mirrors the circumstances that led to the closure of three major banks in the spring of 2023, events that have continued to cast doubts over the stability of the US banking system.


Industry Benchmarks and Comparisons


For context, the industry average benchmark for total CRE exposure in Q1 2024 was 139% of total equity, making the figures for Flagstar and Zion significantly higher and more alarming. Overall, 67 banks reported CRE exposure exceeding 300% of their total equity in their first quarter 2024 regulatory data.


Implications of High CRE Exposure


"This is a very serious development for our banking system as commercial real estate loans are repricing in a high interest-rate environment," Cole warned. The ongoing sale of commercial properties at substantial discounts in the current market means that banks will eventually be compelled by regulators to write down these overvalued assets, exacerbating their financial instability.


Data Analysis and Regulatory Concerns


The risk metrics utilized by FAU are based on publicly available data from the Federal Financial Institutions Examination Council Central Data Repository, released quarterly. Bank regulators consider any CRE exposure ratio over 300% as excessive, thus flagging the bank as having a higher risk of failure.


The danger is not confined to large banks alone. Smaller institutions, those with less than $10 billion in assets, also face significant risks due to CRE exposure. Among banks of all sizes, the data reveals that 1,871 have total CRE exposures greater than 300%, 1,112 exceed 400%, 551 surpass 500%, and 243 have exposures greater than 600%.


Systemic Issues in the US Banking Sector


These figures underscore a systemic issue within the US banking sector, where high exposure to commercial real estate loans in a rising interest-rate environment could precipitate widespread financial distress. As regulators and financial experts continue to monitor the situation, the banking sector faces a crucial period of adjustment to mitigate the risks associated with its CRE portfolios.

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