Data Analysis: Rising CRE Exposure May Spur Bank Mergers

More than 60 of the largest banks in the country have increased risk due to their excessively high exposures to commercial real estate, according to a data analysis from a banking and finance expert at Florida Atlantic University.

Some of the 62 banks, particularly those with lower capital such as Flagstar Bank, Live Oak and First Foundation, also run a higher risk of being forced by regulators to merge with a larger and healthier bank, according to the second quarter 2024 regulatory data report and shown by the U.S. Banks’ Exposure to Risk from Commercial Real Estate Screener produced by FAU’s College of Business.

“We have already seen some of these banks, like Silicon Valley, merged into larger banks like J.P. Morgan. This doesn’t bode well for our banking system as it becomes more concentrated and less competitive,” said Rebel Cole, Ph.D., Lynn Eminent Scholar Chaired Professor of Finance in FAU’s College of Business. “As these banks are considered ‘too big to fail,’ no one thinks regulators will let them go under during a recession. This destroys the confidence of depositors, especially uninsured depositors, in these smaller banks, who disproportionately fund small-business loans, and they provide credit to other areas in the economy where the big banks simply do not.”

The U.S. Banks’ Exposure to Risk from Commercial Real Estate Screener, a part of the Banking Initiative in the College of Business, measures the risk from excessive exposures to commercial real estate at the 155 largest banks in the country with more than $10 billion in assets. Using publicly available data released quarterly by 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.

Among the 4,594 banks of any size, including smaller banks, 1,849 have total CRE exposures greater than 300%; 1,096 have exposures greater than 400%; 536 have exposures greater than 500%; and 293 have exposures greater than 600%.

For comparison, the Q2 2024 industry-average benchmark for total CRE exposure was 138% of total equity.

“Regulators for some reason exclude certain types of commercial mortgages when calculating CRE exposures, which seriously understates the risk facing certain banks,” Cole said. “They split commercial mortgages into owner-occupied and non-owner occupied, and do not count owner-occupied CRE, claiming that such mortgages are less risky than non-owner-occupied CRE mortgages.”

-FAU-