Regional Banks Still Have the CRE Blues

For almost a year, the Federal Reserve Bank along with the Treasury Department have been saying that the banking system is healthy and sound. A look at data suggests that all is not well.

Reuters reported on a list of 10 banks that according to Trepp have heavy commercial real estate loan concentration ratio, a measure of how much each bank’s loan portfolio is concentrated in commercial and multifamily mortgages.

The list ranges from Independent Bank Corp. at the bottom with 302% to New York Community Bancorp’s Flagstar Bank subsidiary at 477%. According to a GlobeSt.com review of Federal Reserve Bank data from September 30, 2023, 8 out of the 10 banks are among the top hundred largest in the U.S. These are not small and insignificant institutions.

Another view comes from the Federal Deposit Insurance Corporation and a list of bank closures by year from 2001 through 2023, including the number of failed banks and their total assets.

During the Global Financial Crisis, the number of failed banks was high: 140 in 2009, 157 in 2010, and 92 in 2011. In comparison, the five failures in 2023 — which includes the high-profile collapses of Silicon Valley Bank, Signature Bank, and First Republic — were tiny. But the total value of assets, at $548.7 billion, was titanic. The only comparable figure in more than two decades was in 2008, where 25 failures totaled $373.6 billion, the bulk of which came from Washington Mutual Bank and its $307 billion in assets.

On Sunday night, 60 Minutes aired an interview with Fed Chair Jerome Powell. Scott Pelley asked Powell, “The value of commercial office buildings all across the country is dropping as people work from home. Those buildings support the balance sheets of banks all across the country. What is the likelihood of another real estate-led banking crisis?”

Powell responded, “I don’t think that’s likely. So, what’s happening is, as you point out, we have work-from-home, and you have weakness in office real estate, and also retail, downtown retail. You have some of that. And there will be losses in that.”

He added that the Fed looked at the balance sheets of larger banks and determined that it was a “manageable” problem. “There’s some smaller and regional banks that have concentrated exposures in these areas that are challenged,” he continued. “And, you know, we’re working with them. This is something we’ve been aware of for, you know, a long time, and we’re working with them to make sure that they have the resources and a plan to work their way through the expected losses. There will be expected losses.”

But in Fed-speak, large banks are those with at least $100 billion in total assets. Silicon Valley, First Republic, and Signature were all in that category. The figure describes only New York Community Bancorp in the Reuter’s list. But the assets of the entire list together are $399.2 billion — smaller than the 2023 failures but larger than those in 2008.

Not that any one bank, let alone all on the list, are going to fail. But together they represent an historically significant risk, and all centered around CRE.