Rising interest rates are causing dislocations in many parts of the economy and finanical sector. One worry is that commercial real estate, under pressure since pandemic-related vacancies, is the next shoe to drop. A research note from Goldman Sachs last week illustrates why small and medium size banks are so important to this part of the economy. They estimate that small and medium size banks account for 80% of commercial real esate loans. Smaller banks have been subject to less deregulation the last few years because the costs of complying with Dodd Frank was so burdsome for them. It is now clear they are also systemtically important. But the push to over-regulate them will increase the cost of capital and could do damage to other critical, and already fragile, parts of the economy.

Source: Goldman Sachs

Allison Schrager is a senior fellow at the Manhattan Institute. Follow her on Twitter here.