We are in a banking crisis that is spreading beneath the gloss of rising markets. One visible problem rarely appears alone. Right now the cracks are not limited to treasuries and interest-rate losses. Commercial real estate is the new weak link and regional banks are sitting on a very large chunk of the exposure.

Executive summary

• Banks are carrying hundreds of billions in unrealized losses. Previously that came from long-duration treasuries. Today commercial real estate is the main risk.
• US banks hold roughly $2.7 trillion in commercial real estate loans and about 80 percent of that is concentrated in smaller regional banks.
• More than $2.2 trillion of commercial loans reset between now and the end of 2027, creating a refinance cliff at much higher interest rates.
• Early signs are showing: fraud-related charge offs, lawsuit disclosures, and isolated defaults have already spooked markets and forced banks to tap emergency liquidity.
• Large national banks are better capitalized and stress tested. Regional banks are far more exposed and less diversified.

How we got here: a quick primer

The banking system operates on fractional reserve principles. Banks do not keep every depositor dollar in cash. They keep a fraction available for withdrawal, lend the rest, and invest some in securities. That structure works when confidence holds and asset values are stable.

From 2020 through 2022, interest rates were essentially zero. Banks parked huge amounts of deposits into long-duration US treasuries because rates were low and liquidity was abundant. When the Federal Reserve pivoted and raised rates aggressively, those bond prices fell, producing large unrealized losses on bank balance sheets.

In 2023 a liquidity shock, withdrawals concentrated at a handful of small banks that had sizable mark-to-market losses, triggered three bank failures. Depositor runs exposed that when many customers want cash at the same time, smaller banks lack the liquidity buffer to absorb that demand without selling assets at a loss.

What is different now: commercial real estate (CRE)

Commercial real estate became attractive when short-term borrowing rates were low. Investors could borrow cheaply and buy assets producing higher yields. That spread created a boom in CRE lending, especially by regional banks who compete for real estate business and offer flexible financing.

Now rates are higher. CRE values are a function of net operating income and prevailing rates. When rates rise, cap rates increase and asset valuations fall. Morgan Stanley has estimated that the CRE segment could fall as much as 40 percent in some scenarios, a magnitude similar to the 2008 crisis in worst-case modeling.

Key figures to keep in mind:

• Approximately $2.7 trillion in commercial real estate loans on US bank balance sheets.
• Roughly 80 percent of that CRE exposure is held by regional banks.
• More than $2.2 trillion of CRE loans will reset between today and the end of 2027.

Why the math matters

Valuation mechanics are simple and unforgiving. A property that generates stable income is worth more when borrowing costs are low and less when borrowing costs rise. If a building generates $60,000 a year, the price someone pays depends on what cap rate they are willing to accept. Higher rates push cap rates up and valuations down. When loans reset at higher interest rates, borrowers may not be able to refinance, payments go up, and defaults rise.

Where the risk concentrates: regional banks

Regional banks have more concentrated CRE portfolios. They also underwrite with more relationship-based lending and flexible covenants. That flexibility is a feature during normal markets and a vulnerability during stress. When defaults or fraud appear in those portfolios, they can create outsized losses relative to the bank's capital.

Contrast that with the largest national banks. Big banks have diversified balance sheets, broader deposit bases, and are subject to rigorous stress testing. They are generally better positioned to absorb CRE price declines and funding shocks.

Recent warning signs and market reaction

• Zions disclosed a roughly $50 million charge off tied to two loans related to borrower fraud. That one disclosure triggered renewed market concerns about hidden CRE losses.
• Western Alliance revealed a fraud-related lawsuit that raised questions about underwriting quality and controls.
• Investment banks and lenders have started warning clients and shareholders about potential hits tied to bankruptcies and restructurings in parts of their loan books.
• Banks tapped overnight liquidity facilities multiple days in a row, an indicator of acute funding stress that markets do not like to see.

Regulatory and market context

Regulators implemented reforms after 2008 meant to curb risky lending. Market participants found ways to move risk into other parts of the financial system, including private credit and loan syndication. That migration made aggregate exposure harder to see in one consolidated place and introduced new counterparty and transparency risks.

Congress has discussed raising FDIC insurance limits as a stopgap to protect larger deposits, with some proposals floating numbers far above the current $250,000 standard. That is a political response, not a fix of structural asset-quality problems.

Credit agencies have pushed back in aggregate, noting that overall default rates on high yield debt remain below the double-digit levels seen in a major systemic crisis. That does not mean localized losses or bank-level failures are impossible. It simply means the system-wide metrics do not yet scream 2008-style distress.

What this means for you and what you should do

Practical risk management is straightforward. Here is a checklist to reduce personal banking exposure and react sensibly to the current environment.

1. Keep deposits under FDIC insurance limits per bank. The standard is $250,000 per depositor, per insured bank, for each account ownership category.
2. Spread cash across multiple banks and account types. That reduces single-counterparty concentration risk.
3. Prefer larger national banks for large deposits. They are better capitalized, more diversified, and more likely to withstand localized CRE losses.
4. Watch bank-level disclosures: charge offs, nonperforming assets, loan-to-value trends, and loan maturities. Banks that report growing loan delinquencies or rising loss allowances deserve scrutiny.
5. Consider diversifying into assets and strategies that are less correlated with traditional banking risks. That can include short-duration fixed income, high-quality corporate credit, and non-bank alternatives.

How I think about allocation and banking exposure

My approach is simple and repeatable. I maintain deposit balances across several large institutions and keep emergency cash within insured limits. For excess cash I evaluate risk-return tradeoffs and avoid parking material sums at smaller banks unless I am comfortable with the underwriting and the bank's capital metrics.

When a market offers attractive yield and I can verify underwriting quality, I participate. When the path to yield requires opaque structures or concentrated counterparty exposure, I step back.

Final takeaways

• Commercial real estate is the current concentration risk for US banks, not treasuries alone.
• Regional banks hold the lion's share of that exposure, making them the logical focal point for problems that start small and spread.
• Systemic collapse is not inevitable, but the probability of localized failures and tighter lending standards is material. Expect credit availability to tighten if defaults climb.
• Protect yourself: diversify deposits, stay inside insurance limits, monitor bank disclosures, and be pragmatic about where you hold larger balances.

"When you see one cockroach, there are probably more." This is the right mental model. One disclosed loss often precedes more, not because of conspiracy, but because of correlated underwriting and cyclical valuation shifts.

Sources and further reading

• Federal Deposit Insurance Corporation on deposit insurance: https://www.fdic.gov
• Federal Reserve: regulatory information and stress test summaries: https://www.federalreserve.gov
• Moody's Research and commentary on credit trends: https://www.moodys.com
• Morgan Stanley research referenced on commercial real estate downside scenarios: https://www.morganstanley.com
• Major news coverage on recent bank charge offs and liquidity draws: refer to mainstream outlets such as CNN and Bloomberg.