The fear of a regional banking crisis is on the rise due to underwater commercial real estate loans, as nearly 300 banks with significant exposure to commercial real estate may require a capital infusion or a merger to avoid collapse. These banks, with a total of $900 billion in assets, have real estate loans exceeding 300% of their capital, resulting in unrealized losses on low-interest loans made before the Federal Reserve initiated its aggressive rate-hiking campaign. Most at risk are community banks with assets less than $10 billion, while larger regional banks with assets between $10 billion and $100 billion are also in danger.
The situation has regulators treading cautiously, as the sheer volume of troubled banks poses a challenge. Experts suggest that troubled banks may seek merger partners to weather the storm, but this is easier said than done due to regulatory scrutiny on such moves. The industry is hopeful that federal rate cuts in the coming months will alleviate the pressure on struggling banks, although the hot inflation in 2024 makes it less likely for an immediate rate cut. Despite a decrease in embedded bank losses, Klaros predicts that losses will rise back to the trillion-dollar mark by the end of the first quarter as treasury yields increase, compounded by nearly $1 trillion of commercial real estate loans expected to mature this year.