Do California Banks Have The Most Exposure to Commercial Real Estate Loans?

One year post the SVB collapse, California's banking sector is under scrutiny due to its significant exposure to commercial real estate (CRE) investments, sparking concerns over potential risks and losses.

High Concentration of CRE Loans
California banks exhibit the highest concentration of commercial real estate loans in the U.S. Relative to their capital, nearly a third of the state's banks hold property debt surpassing 300%, a threshold that attracts regulatory attention. The backdrop includes a commercial property market strained by historic interest rates, elevating the risk of loan defaults for banks.

Regional Banking Dynamics
Despite California's economic prowess, its banking sector remains fragmented, with Wells Fargo being the lone major bank headquartered in the state. Regional banks, heavily dependent on CRE, lack diversified revenue streams, heightening their risk exposure. Notably, high concentrations in specific client segments, such as venture capital or affluent individuals, have led to significant failures, including Silicon Valley Bank and First Republic Bank.

Spotlight on River City Bank
River City Bank in Sacramento exemplifies the aggressive lending trend, with its assets ballooning to $5 billion over five years. Despite claims of prudent lending practices, its CRE loans now surpass 660% of its capital, the highest among all California banks. However, River City Bank isn't an outlier, as almost 30% of the state's registered banks hold property debt exceeding the 300% capital mark.

Challenges and Regulatory Scrutiny
California's regional banks face mounting pressure amid a softening property market and rising interest rates, leading to increased vacancies and declining property values. These challenges necessitate banks to fortify their balance sheets against potential bad loans. Regulatory bodies like the Federal Reserve and the Office of the Comptroller of the Currency are closely monitoring the CRE market to avert another financial collapse.