As the federal government strives to contain financial market turmoil, the next risk looming over the nation’s banks is in plain sight: the $20 trillion commercial real estate market.

Some $1.5 trillion in mortgages will come due in the next two years, a potential time bomb as higher interest rates and spiraling office vacancies push down property values.

And because 70 percent of bank-held commercial mortgages sit on the balance sheets of regional and smaller lenders, a write-down in commercial loans could spell big trouble for the financial system and spill over into the larger economy just as the 2024 presidential campaign gets underway.

With the country careening toward a possible recession, the financial system is especially vulnerable to shocks as the turbulence sparked by the collapse of three regional banks showed. Adding a commercial real estate market slide to the mix would be particularly perilous. It’s a concern that’s top of mind for policymakers in Washington — even as they acknowledge there’s not a lot they can do to fend off a crisis.

“Am I worried? The short answer is yes,” Sen. John Kennedy (R-La.), a senior member of the Senate Banking Committee, said in an interview. “The long answer is hell yes.”

“I hope the Federal Reserve and the banking regulators are worried as well, and I hope they won’t be caught flat-footed like they were with the bank failures that we’ve had so far,” Kennedy said.

Fed policymakers last month raised interest rates for the 10th straight time, by a quarter point, putting more pressure on both the real estate industry and on banks.

Chair Jerome Powell has largely downplayed a threat posed by the commercial real estate market, describing the banking system as “strong and resilient.” But FDIC Chair Martin Gruenberg stressed at a May 31 press conference that it’s a significant risk and said his agency is urging lenders to prioritize managing their exposure to the sector.

And the Fed itself flagged commercial real estate as an area of concern in its May Financial Stability Report, warning that “the magnitude of a correction in property values could be sizable and therefore could lead to credit losses” by banks and investors holding commercial real estate debt.

Some lawmakers share that concern.

“Right now, we have the double whammy of much higher interest rates and the commercial real estate market going through a shock post-Covid,” Sen. Mark Warner (D-Va.) told POLITICO. “So I don’t think we can presume that… we’re going to be able to simply glide through [without a crash].”

“I’m still trying to sort through some of the policy options,” said Warner, who declined to detail his ideas. “I have encouraged the White House, though, that we need to do some more intervention on these regional banks right away.”

White House economic adviser Jared Bernstein told a panel of lawmakers in April that the issue “is very much on our watch list” when asked about the potential for a significant downturn in the market.

Sen. Elizabeth Warren says regulators have a key role to play in heading off any crisis.

They need to “insist that banks and other lenders appropriately hedge against the risks of a significant downturn in commercial real estate,” the Massachusetts Democrat said.

Sen. Elizabeth Warren says regulators have a key role to play in heading off any crisis.