Report: Here’s the Domino That Could Kickstart Another Banking Crisis

According to experts, small and mid-sized banks could be facing another crisis in the near future, due to their outsized investment in the commercial real estate sector, which is struggling due to lack of demand and high interest rates.

According to Federal Reserve data, small banks hold only 36% of all loans, but own around 70% of commercial real estate loans. There are concerns that their exposure to the struggling commercial real estate sector poses a significant risk and could trigger another banking crisis, as those banks rely on returns from developers that may not be paid out.

“My view is that the commercial property market is a slow-moving train wreck that is going to have a major adverse effect on the regional banks,” Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Daily Caller. “That, in turn, could derail the economic recovery and force the Federal Reserve to cut interest rates in a big way. The basic problem for the commercial property market is the record high vacancy rates that have resulted from the increased post-COVID trend for people to work at least part of the week at home rather than at the office.”

Between now and 2028, approximately $2.81 trillion in commercial real estate loans are set to come due, forcing firms to decide whether to pay off the loan in its entirety or refinance at a higher interest rate. In 2023 alone, $544.3 billion in commercial real estate came due, the largest amount in history. This led many developers to refinance under current credit conditions, which are abnormally costly.

Interest rates for these loans are being increased by hikes to the federal funds rate by the Federal Reserve, which is currently sitting in a range of 5.25% and 5.50%, but may decrease to around 4.6% this year, leading to some relief for developers.

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