One of the regionals slipped under the waterline last Friday. Not national news yet. Not big enough to trigger Fed chatter. But it defaulted. Real estate and private equity exposure stacked too high. Cash ran thin. Doors didn’t close, but they missed a payment.
This combo is the weak joint. Regional banks leaned hard into real estate from 2020 through 2022. Office loans made sense when rates were near zero. Refinance markets were liquid. Now they’re stuck rolling paper into a 7% world with low occupancy and stale collateral. At the same time, many of these banks lent into sponsor-backed deals where private equity stacked leverage high and layered risk wide. That’s now backfiring.
Borrowers are struggling. Equity sponsors are exiting. Banks are left with the top of the debt stack and nowhere to hand it off. Office delinquencies are running hot. S&P’s latest numbers put CRE delinquencies at 2.3% in Q1, up from 1.6% a year ago. Some banks are running north of 5% in office alone.
And that’s just the on-book stuff. Off-balance sheet exposures from fund participations, JV mezz deals, and warehouse facilities are murkier. The regulators know this. The market is starting to sniff it out.
Liquidity is deteriorating. The BTFP is gone. Deposit costs are still climbing. Banks are bleeding margin and crossing their fingers that held-to-maturity losses don’t become real. But one borrower missing covenants on a $90 million downtown office tower changes the narrative fast.
Look at $KDE and $IAT. Neither is collapsing. But both are slipping, and volume just jumped. A few more of these Friday events and the floor gets shaky. Quiet defaults rarely stay quiet for long.
what about regionals? the RB+PE combo can’t possibly end well… and one just defaulted friday. I think many more soon. $IAT / $KDE
— Brandon Moretz (@brandonmoretz) June 29, 2025
Sources
https://www.spglobal.com/_assets/documents/ratings/research/101615562.pdf