Interest Reserves

There's a big ticking time bomb for smaller banks which issue a lot of commercial real estate/construction loans.

Regulators are increasingly worried about a lending practice that allows real-estate developers to delay paying construction-loan interest but can mask problems at the banks that made the loans.

Small banks, which are more exposed relative to bigger banks, have $280 billion of outstanding construction loans overall, mostly to condominium developers and home builders. When the loans were made, the banks calculated the interest that would be paid and put that money aside in "interest reserves." In essence, the banks pay themselves until the loan becomes due or the property generates cash flow.