The U.S. banking system is on a precipice as exposures to commercial real estate grow and banks grapple with high interest rates, according to an analysis by a finance professor at Florida Atlantic University.

The U.S. banking system is on a precipice as exposures to commercial real estate grow and banks grapple with high interest rates, according to an analysis by a finance professor at Florida Atlantic University.

Of the 158 largest banks, 59 in the country are facing exposures to commercial real estate greater than 300% of their total equity capital, as reported in the fourth quarter 2024 regulatory data and shown by the U.S. Banks’ Exposure to Risk from Commercial Real Estate screener.

According to Dr. Rebel Cole's research and analysis, the banks that present the most systemic risk because of their size are Flagstar Bank, Zion Bancorp, Valley National Bank, Synovus Bank, Umpqua Bank and Old National Bank, each of which has more than $50 billion in total assets.

“Regulators have been putting pressure on banks to reduce their exposures. However, it’s a very difficult thing to do without sending a signal of weakness to the market and creating more problems,” said Rebel A. Cole, Ph.D.,  Lynn Eminent Scholar Chaired Professor of Finance in FAU’s College of Business. “To get around this, many banks are ‘extending and pretending’ by restructuring their loans.”

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 158 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 (FFIEC) 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.

Troubled debt restructuring for commercial construction, multifamily, owner-occupied and owner-non-occupied mortgages tripled since 2023. They reached $18 billion in the fourth quarter of 2024, up from $6 billion in Q2 2023, according to data from the FFIEC. While non-owner occupied nonfarm, non-residential accounts for more than half of these amounts, there is also serious deterioration in multifamily and commercial construction loans.

“Banks choose to extend these loans, hoping interest rates might drop. While the Fed did cut rates,” Cole said. “If a loan is maturing from five years ago in today’s rate environment, rather than refinance it with today’s terms, they will restructure the loan under the same terms from five years ago for another year. This all depends on interest rates falling, which is not likely to happen this year.”

 Among banks of any size, 1,788 have total CRE exposures greater than 300%, up from 1,697 in Q3; 1,077 have exposures greater than 400%, up from 971 in Q3; 504 have exposures greater than 500%, up from 426 in Q3; 216 have exposures greater than 600%, up from 166 in Q3.

For comparison, the aggregate industry total CRE exposure is 132% of the total, unchanged from the third quarter of 2024.

-FAU-