The Federal Reserve’s December 2025 Supervision and Regulation Report features a core message: “the U.S. banking system remains strong.” Yet at the same time, all doesn’t seem well and that will be enough to make the Fed monitor the situation.
In addition to some reshaping of the capital framework, including a reduction of the supplementary leverage ratio and questioning some other requirements, there were concerns about CRE loan delinquencies at community banking organizations (CBOs, 3,367 in the U.S.) and regional banking organizations (RBOs, 100 in the U.S.).
CBOs have less than $10 billion in total assets and RBOs possess between $10 billion and $100 billion in total assets. Both categories are heavily involved in CRE lending.
The Fed said that both types have “lower levels of past due and classified loans than they have had compared to their average over the previous 10 years.”
“However, as discussed above, delinquencies on CRE loans and consumer loans remain above the averages from the past decade,” the report continued.
“Supervisors remain focused on CBOs and RBOs that are concentrated in CRE lending, particularly the office and multifamily sectors.
Jason Alpert, a 20-year workout banking veteran who is now the managing partner of Castlebar Holdings, offered a translation for GlobeSt.com: “We know there’s distress in the CRE market. We’re concerned about having over concentrations in that, and we are going to do our best to make sure the safety and soundness are strong, and that’s it.”
That isn’t a terrible concern on the surface. The Fed noted that financial conditions are stable for CBOs and RBOs, while some other financial institutions face higher operating expenses and are increasing their allowances for credit losses.
However, for CRE, it is concerning that the central bank called out both the office and multifamily segments by name.
“Elevated interest rates, tighter underwriting standards, and lower commercial property values may affect CRE borrowers’ ability to refinance or pay off their loans,” the report commented.
“Supervisors are monitoring CRE loan trends, including trends in modifications. Supervisors are also closely reviewing CBO and RBO broader underwriting practices, classifications, and credit loss reserves levels.”
Banks have been managing such issues with loan modifications that often follow the “extend-and-pretend” strategy of pushing off problems for another day.
“If you check the loan sales market, for what that statement says, you’d think there’d be a lot more banks selling assets on pretty good valuations and getting the CRE concentrations down and getting more capital in,” Alpert says. “It tells me that banks don’t have a positive incentive to do it.”
He adds that many banks want to “grow their balance sheet and someone can buy them and senior leadership will make out like a bandit.”
Ironically, Alpert adds, “Your first loss is your best loss. If there is foreclosure, it’s 55 cents on the dollar. If I can sell it today, it’s 75 cents.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.