Six regional U.S. banks have failed in 2026, the most recent being Nano Banc on September 25th. That is the highest count of any year this decade, three times the two failures recorded in each of 2024 and 2025. By dollar value, it is close to nothing. The six held roughly $1.4 billion in combined assets. The five banks that failed in 2023 held more than $540 billion.
The risk of contagion to the broader banking system looks low, and depositors in all six failures walked away whole. What has not improved are the macro conditions pressing on small banks: a central bank that has started raising rates again, a commercial real estate (CRE) refinancing wall cresting this year, and deposit competition from institutions that can outbid anyone.
The Six
The first was Metropolitan Capital Bank & Trust in Illinois, closed by state regulators on January 30th over an impaired capital position. The Illinois Department of Financial and Professional Regulation appointed the Federal Deposit Insurance Corporation (FDIC) as receiver, and the FDIC sold the remaining assets to First Independence Bank, based in Detroit.
Four more followed, each in a different state and each small. Community Bank and Trust – West Georgia failed in Georgia on May 1st with about $306 million in assets. Kentland Federal Savings and Loan Association failed in Indiana on July 10th with $3.8 million, which made it the smallest bank in the country. Small Business Bank failed in Kansas on July 17th with $73 million. Tioga-Franklin Savings Bank, founded in 1873, failed in Pennsylvania on August 21st with $68 million, and its entire deposit book moved to another Philadelphia thrift over a weekend.
The Largest of the Six
The most recent failure, California’s Nano Banc, was by far the largest. As of June 30th, the bank, based in Irvine, reported $736 million in total assets and $686 million in total deposits. The next largest failure of the year had less than half that. Sunwest Bank of Utah assumed all deposits, including the uninsured ones, and purchased roughly $476 million of the assets. The FDIC estimates the failure will cost its Deposit Insurance Fund about $114 million.
In every case, customer deposits were assumed by an acquiring bank, which is what kept these closures from becoming runs. Each failure also happened in a different state, so the underlying problem is not regional in itself.
A Governance Problem Before a Rate Problem
Of the six, Nano Banc was the worst run. California’s Department of Financial Protection and Innovation (DFPI) cited a multi-year pattern of executive mismanagement and regulatory violations. A March capital order had required tangible shareholders’ equity of at least 9.5% or an exit through sale, merger or liquidation. Nano did neither, and its equity fell below the statutory 3% floor after a $75.3 million net loss. The Federal Reserve and the DFPI had been issuing enforcement actions against the bank since February 2021.
That pattern repeats across the list. Tioga-Franklin had operated under an FDIC consent order since April 2024 covering board supervision, management performance, credit administration, and Bank Secrecy Act compliance. Kentland Federal was closed as critically undercapitalized. Community Bank and Trust followed an FDIC enforcement action issued that April. These were governance failures, flagged by regulators years before the closures, rather than sudden casualties of the rate cycle.
What the macro environment decides is how long a weak bank gets to stay open. And it is tightening.
Margins Squeezed Thin
On September 16th, the Federal Open Market Committee (FOMC) raised its benchmark interest rate by a quarter percentage point, to a target range of 3.75% to 4%. The vote under chair Kevin Warsh was unanimous, and it was the first increase since July 2023, a reversal from where prognosticators thought the federal funds rate was headed at the beginning of 2026. Core PCE inflation has run above 3% every month this year.
Higher interest rates generally create thinner profits for regional banks. Depositors begin to look for better returns elsewhere, which forces banks to pay higher interest to retain them, which in turn compresses net interest margins.
Regional banks also hold substantial securities portfolios bought when rates were lower. Industry-wide unrealized losses on those holdings fell 36% in 2025, to $306 billion, according to the FDIC’s own risk review, which still described them as elevated. Rates are now heading back up.
During fourth-quarter earnings calls in 2025, several regional bank managers told investors they expected an uptick in commercial lending. The 2026 interest rate environment proved less favorable. Fixed income markets have been pricing in further increases, though the picture is contested. The Fed’s own dot plot shows a median of one more hike this year, and on September 29th, Federal Reserve Bank of New York president and FOMC vice chair John Williams ruled out an October move, pushing the odds of a hike at that meeting down to roughly even.
CRE Refinancing Wall
Concurrent with the headwinds facing commercial lending, regional banks are also facing a CRE refinancing wall. Most of the maturing loans were written between 2019 and 2022, when borrowers locked in 3% to 4% money. Those commercial and multifamily loans are coming due now, representing roughly $936 billion on S&P Global’s estimate, or $875 billion on the Mortgage Bankers Association’s survey basis, all of it to be refinanced into higher borrowing costs and softer property valuations. The average coupon on maturing CRE debt runs around 4.76%. New originations in July were closer to 6.24%.
The weight of that falls on the small end of the industry. Banks outside the 25 largest held about $2.07 trillion in CRE loans as of March, roughly 70% of all CRE exposure in the domestic banking system.
Office vacancies play an outsized role. Despite recent calls for return-to-office, demand for office space has remained weak. Lenders might previously have followed the motto “extend and pretend,” but higher interest rates are creating an environment increasingly resistant to rolling over debt without more stringent terms.
CRE loans are substantially more expensive than they were a decade ago, which has pushed borrowers toward private credit and gap funding. Q4 is expected to carry the largest share of the refinancing wall.
Big Banks Put on the Pressure
Meanwhile, big banks have continued to eat into regional banks’ markets. They have the size and leverage to offer customers more attractive rates than a community bank can match.
Technology plays a hand as well, as more banking services move to a phone and require no branch at all. That lets the largest institutions reach customers who would otherwise stay with a local bank out of habit.
Investment banks are also knee-deep in the data center boom, providing billions of dollars to finance large infrastructure projects across the United States. Regional banks lack the heft to finance those projects, but have engaged in indirect supply chain lending, extending loans to manufacturers and equipment suppliers.
What Recent Events Tell Us
In the wake of the Silicon Valley Bank failure in 2023, Columbia Business School professor Tomasz Piskorski and several colleagues set out to measure what rising rates and CRE distress actually do to bank solvency, examining the asset composition and deposit funding of 4,844 FDIC-insured banks. Their headline figure: U.S. banks lost roughly $2 trillion in aggregate asset value over the course of the Fed’s tightening cycle.
In Piskorski’s words, a typical American bank is “90 percent debt-financed and only about 10 percent equity.” Most of that debt is deposits, about half of them uninsured. On those numbers, a 10% decline in the value of a bank’s assets can be enough to render it insolvent, and uninsured depositors are the ones with a reason to run before it does.
The confluence of higher interest rates, a refinancing wall and competition from much larger institutions presents real risks for small banks. For now, supervisors are not alarmed. The FDIC counted 47 problem banks at the end of the second quarter, 1.1% of the industry and down by seven, which it describes as within the normal range for a non-crisis period.
Bank failures act as a warning sign that hawkish monetary tightening might be overburdening parts of the financial system. But with inflation stubbornly above target, those warning signs are likely to go unheeded for now.
The Number Worth Watching Is Next Year’s
Six failures in a year is not a crisis. It is a measurement, and what it measures is the thinning of the long tail of American banking: single-branch thrifts, undercapitalized savings and loans, a 1920-vintage institution in Indiana carrying $3.8 million, a California startup lender whose executives spent five years under enforcement orders. The Fed did not kill any of them. All of them were running with no margin for the environment the Fed is now building.
The depositor side of this is a solved problem. Every insured dollar moved, most of the uninsured ones did too, and the combined hit to the insurance fund across the four failures with published estimates comes to about $140 million. That is a rounding error against a fund built for a genuine crisis.
A bank failure is a lagging indicator. Whatever October and December do to net interest margins, and to $936 billion of maturing commercial mortgages, will not appear on the FDIC’s failed bank list until 2027. Six is this year’s number. Next year’s is the one that will say something about the economy.
Author: Tim Tolka, Senior Reporter
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
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