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Nearly 300 Banks Are Vulnerable Because Of Their CRE Loans, Study Finds

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Banks may need to find equity or merger partners to avoid collapse.

Fears of a regional banking crisis fueled by underwater commercial real estate loans aren’t going away.

Nearly 300 banks with heavy CRE exposure could need a capital infusion or to merge with another institution to avoid failure, according to a report from the banking industry consulting firm Klaros Group. 

The study found that 282 banks with $900B in total assets combined have real estate loans that make up more than 300% of their capital and have a high proportion of unrealized losses on low-interest loans made before the Federal Reserve started its aggressive rate-hiking campaign, CNBC reported

The vast majority of the banks at risk are community banks with less than $10B in assets, Klaros found. Of the 4,000 banks the firm analyzed, more than 7% are deemed as under stress. The report did not name specific banks out of caution of creating a bank run.

Still, 16 regional banks with assets between $10B and $100B could be at risk, based on the study, and those hold more assets than the combined 265 community banks in the study. The sheer volume of troubled banks has regulators being cautious in dealing with them, Klaros co-founder Brian Graham told CNBC.

“If there were just 10 banks that were in trouble, they would have all been taken down and dealt with,” Graham said. “When you’ve got hundreds of banks facing these challenges, the regulators have to walk a bit of a tightrope.”

While the situation may prompt troubled banks to find merger partners, that is easier said than done, experts say, especially over growing concerns that regulators may put these moves under scrutiny. Last year TD Bank’s proposed acquisition of First Horizon died after it was challenged by regulators. Most recently, some lawmakers and consumer organizations have openly opposed the planned Capital One and Discover merger announced in February.

The industry continues to hope that the Fed will begin cutting its benchmark rate again in the coming months, which would ease the pressure on struggling banks. But while experts expect the Fed to cut rates later this year, hotter-than-expected inflation to start 2024 makes it less likely the first cut would come this month, Reuters reported

Embedded bank losses, through unrealized securities and loan mark-to-market losses, dropped to $700B from $1T at the end of the fourth quarter of 2023, according to Klaros, which predicted in a separate rote that the number will rise back to the trillion-dollar mark by the end of the first quarter as 5-year and 10-year treasury yields rise again.

Adding to the woes — nearly $1T of commercial real estate loans are expected to mature this year alone, according to the Mortgage Bankers Association.

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