Revelations from Zions and the Western Alliance in the United States raise fears
Falls spark comparisons to 2023 banking crisis
High stock market valuations and already nervous investors
SINGAPORE/LONDON, Oct 17 (Reuters) – Fears over the credit quality of U.S. regional banks reverberated through markets on Friday, dragging global financial stocks lower and rekindling memories of the crisis that shook confidence just over two years ago.
The sell-off hit Wall Street, with major stock indexes seeing a mixed open as investors remained focused on concerns in the banking sector, adding to anxiety already heightened by escalating U.S.-China trade tensions and renewed worries about the global economic outlook.
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The banking sector’s exposure to two recent U.S. auto bankruptcies has reignited concerns about lending standards more than two years after Silicon Valley Bank collapsed, when high interest rates led to paper losses on its bonds and triggered a global rout in banking stocks.
Investors are now trying to gauge whether recent problems in U.S. credit markets will have a similar effect, as an overnight sell-off on Wall Street spread across Asia and Europe and highlighted the recent push for AI in broader stock markets, which some fear may have created a bubble.
Some analysts said that at this point, concerns about U.S. regional banks seemed idiosyncratic rather than a sign of something more systemic.
“Pockets of the US banking sector, including regional banks, have caused market concern,” said Russ Mould, chief investment officer at AJ Bell.
“This includes Sions reporting an unexpected loss on two loans and Western Alliance alleging that a borrower committed fraud.”
MARKET BACKGROUND SAW
Some of the biggest U.S. banks fell on Friday, ending a week marked by generally strong profits on a somber note.
The KBW Banks Index, which tracks large-cap banks, fell 0.4%.
White House economic adviser Kevin Hassett said Friday that banks have sufficient reserves and that he is optimistic that credit markets can stay ahead of the curve.
He added in an interview with Fox Business Network that Trump administration officials, led by Treasury Secretary Scott Bessent and the Federal Reserve’s Michelle Bowman, were “cleaning house right now,” without providing further details.
“What we’re seeing in overnight bank sales in the United States, Asia is realizing it, Europe is realizing it, and so it’s spreading,” said James Rossiter, head of global macro strategy at TD Securities.
European Banks (.SX7P)open a new tab fell almost 3%, with Deutsche Bank (DBKGn.DE)open a new tab and Barclays (BARC.L)open a new tab sliding around 6%, and Société Générale (SOGN.PA)open a new tab down 4.6%, after Asian financial companies, notably Japanese banks (.IBNKS.T)open a new tab and insurers (.IINSU.T)open a new tab sank.
In early U.S. trading, the SPDR S&P Regional Bank ETF (KRE.P)open a new tab was up 0.4%, a day after the benchmark index fell 6%, its biggest one-day drop in six months.
Truist Financial (TFC.N) Strong Profitsopen a new tabFinancial Regions (RF.N)open a new taband fifth third (FITB.O)open a new tab boosted investor confidence, sending most U.S. regional banks higher in morning trading.
Zions Bancorp (ZION.O)open a new tabat the heart of investor monitoring, regained lost ground, after closing down 13%. Western Alliance (WAL.N)open a new tab was up 2.6% after losing around 11% on Thursday.
“Despite growing hopes of further rate cuts this year, attention is turning to the underlying health of the economy, as emerging credit losses among U.S. regional banks raise new questions about lending practices,” said Derren Nathan, head of equity research at Hargreaves Lansdown.
The KBW U.S. Regional Banking Index (.KRX)open a new tab closed down 6.3% on Thursday.
Banking stocks are under pressure but have generally had a good year globally.
The latest sale came after Zions announced it would take a $50 million loss on two commercial and industrial loans from its California subsidiary, while Western Alliance (WAL.N)open a new tab revealed that it has filed a lawsuit over alleged fraud by Cantor Group V, LLC. Cantor’s lawyers have denied the allegations.
Credit writedowns on private debt have increased and default rates have reached 5.5%, said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, citing the latest available data for the second quarter.
Despite fragile gains in U.S. bank stocks, the gloom has spread to other pockets of the U.S. financial sector, weighing on mortgage lenders, buy-now-pay-later firms and brokerages.
Analysts say any credit crack on Wall Street risks spilling over into other areas of the financial sector.
Robinhood (HOOD.O)open a new tab and interactive brokers (IBKR.O)open a new tab fell 1.5% and 2%, respectively.
Jamie Dimon, CEO of JPMorgan Chase, said earlier this week of credit markets: “When you see one cockroach, there are probably others, and so everyone should be warned.”
BROADER IMPACT ON THE MARKET
“The market is clearly aiming for perfection,” said Bo Pei, an analyst at US Tiger Securities. “This leaves sentiment vulnerable, so even isolated negative headlines can trigger outsized reactions like what we saw yesterday.”
European Bank Stocks (.SX7P)open a new tab are up about 40% since the start of the year. Gold, for its part, reached a new record.
U.S. banks borrowed nearly $15 billion from the Federal Reserve’s Permanent Repo Facility (SRF) on Wednesday and Thursday, suggesting difficulty meeting their funding obligations with a large net settlement of Treasuries expected this week.
This is the largest two-day borrowing since the Covid-19 pandemic.
As of Friday morning, however, banks have not called on the repo facility, although they will have another chance to do so in the afternoon.
The SRF acts as a safety net in the event of possible funding shortfalls. Introduced in July 2021 in response to the pandemic, the Fed facility provides overnight cash loans twice daily in exchange for eligible collateral such as U.S. Treasury bonds.
“The market has been worried about a bubble in private credit in recent months,” said Alan Devlin, global financial research analyst at Impax Asset Management. “In fact, the market shoots first and asks questions later.”
Reporting by Ankur Banerjee in Singapore and Alun John in London and Manya Saini in Bangalore. Additional reporting by Gertrude Chavez-Dreyfuss, Kevin Buckland, Stella Qiu, Dhara Ranasinghe, Jose Joel, Pritam Biswas and Medha Singh. Editing by Mark Heinrich, Mark Potter and Nick Zieminski
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Manya reports on major publicly traded U.S. financial companies, including Wall Street’s largest banks, card companies, asset managers and fintechs. She also covers late-stage venture capital financing, initial public offerings on U.S. exchanges, and regulatory developments in the cryptocurrency industry. His work appears in the finance, markets, business and future of money sections of the Reuters website. An avid reader, she loves books of all genres, from classics to contemporary fiction. She holds an undergraduate degree in political science from the University of Delhi and a master’s degree in journalism from the Symbiosis Institute of Media and Communication.
