The default rate on commercial mortgages doubled to 3.4 percent in the third quarter, posing the largest risk to U.S. banks in 2010, bank examiners say.

Federal Reserve Governor Elizabeth Duke said in a speech Monday that credit conditions in commercial real estate are particularly strained.

According to data compiled by Bloomberg, regional banks are four times more concentrated in commercial property loans than the largest lenders and, therefore, more vulnerable.

The strong get stronger and the weak get weaker, said Joel Conn, president of Lakeshore Capital LLC in Birmingham, Ala., which specializes in financial stocks. It is very difficult to come up with a scenario where earnings get anywhere back to normal for small banks with large commercial real estate exposures.

Source: Bloomberg, Craig Torres (01/06/2010)