Global banking stocks shudder as U.S. credit risks spark reality check

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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%.

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.

“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.

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.

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.”

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.”

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