"US Regional Banks and the Contraction in Credit Markets"

Alarming Decline in Regional Banks in the US

On Thursday, the shares of two major regional US banks sharply declined following revelations that companies had been defrauded on loans from funds investing in troubled commercial mortgages. This has increased concerns that new cracks could emerge in the credit markets.

Pressures on Zions Bancorp and Western Alliance Bancorp

Zions Bancorp announced a $50 million write-down on a loan from its subsidiary California Bank & Trust, leading to a 13% drop in its shares. Another regional bank, Western Alliance Bancorp, experienced a decline of about 11% after it revealed that it had also extended credit to the same borrowers. Both banks were among the companies that experienced the largest declines in the KBW Bank Index in the last six months.

Bad News from Other Companies

Sector news from bankrupt companies like Tricolor Holdings and First Brands Group is also noteworthy. JPMorgan Chase and Fifth Third Bancorp announced hundreds of millions of dollars in losses related to Tricolor. While large banks can typically absorb such losses with ease, these types of losses can be much more devastating for regional banks.

Risks and Market Reaction

A similar crisis occurred in 2023 after the Fed raised interest rates, leading to the failure of some smaller banks, including Silicon Valley Bank. Wells Fargo & Co. analyst Mike Mayo commented, "If JPMorgan has a credit issue with Tricolor, it's not that significant. But if similar problems arise at smaller banks, it could pose a much bigger blow."

Investor Perception and Risk Probability

In light of these fluctuations in the credit markets, investors may experience a contraction in risk appetite. Miller Tabak & Co LLC chief market strategist Matt Maley stated, "In investors' minds, the turmoil in regional banks just two and a half years ago is still fresh. Therefore, news about Zions and Western Alliance will be on investors' radar concerning credit quality."