As the press and federal government focus on the super regional banks that are deemed too big to fail, the looming commercial real estate breakdown threatens many small and midsized institutions. The Wall Street Journal looked into the impact a collapse in the commercial market would have to their capital positions.

Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy’s woes deepen, according to an analysis by The Wall Street Journal. Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.

Total losses at those banks could surpass $200 billion over that period, according to the Journal’s analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks analyzed by the Journal.

The potential losses on commercial real estate are by far the largest problem facing the midsize and small banks, easily exceeding losses on home loans, which could total about $49 billion, according to the Journal’s analysis. Nearly one-third of the banks could see their capital slip to risky levels because of commercial real-estate losses, the Journal found.

The Journal, using data contained in banks’ filings with the Federal Reserve, examined the financial health of 940 small and midsize banks. It applied the loan-loss criteria that the Fed used in its stress tests of the largest banks.

Does the government have the resources left to insure deposits if heavy FDIC seizures occur? What does it mean for the availability of credit to consumers, will lending practices tighten further? Commercial real estate is like the big elephant in the room, everyone knows it exists but no one wants to talk about it.

Financials led the last market rally, its only a matter of time before the shoe drops….