US regional banking stocks fell sharply on Thursday after two banks disclosed issues with bad and fraudulent loans, amplifying concerns on Wall Street around the state of credit markets.
Zions Bancorp announced it had a $50m charge-off over two bad loans from its subsidiary, California Bank & Trust in San Diego. Western Alliance also said it was dealing with a fraudulent borrower.
Zions stock was down over 11% by Thursday afternoon, while Western Alliance was down over 10%. Shares of Jefferies Financial Group were down 9% for the day.
The sell-off knocked the wider market, with the benchmark S&P 500 down 0.7% and the Dow Jones down 0.6% in New York.
The regional banking industry has been under scrutiny after First Brands, an auto parts supplier, filed for chapter 11 bankruptcy in late September over creditor concerns.
In its bankruptcy filing, First Brands disclosed that it had at least $10bn to $50bn in liabilities against $1bn to $10bn in assets, the product of what appeared to be risky off-balance-sheet financing.
Amid the bankruptcy, First Brands’ creditors filed an emergency court filing saying that $2.3bn of the company’s assets had “simply vanished”.
Prosecutors at the justice department said they were investigating the bankruptcy, and regional banks have faced intense scrutiny in light of what some worry were questionable lending practices.
Jefferies, a regional bank, and UBS said they had hundreds of millions of dollars in exposure to First Brands. Shares in Jefferies have fallen 25% over the past month.
In the aftermath, some experts have pointed out the bankruptcy shows cracks in the system that allows for “shadow banking” – when a borrower turns to private services outside the traditional banking system to get financing. In the case with First Brands, the company gave lenders unpaid invoices as a form of collateral.
On a call with analysts on Tuesday, JP Morgan’s chief executive, Jamie Dimon, said his “antenna goes up when things like that happen”.
“I probably shouldn’t say this, but when you see one cockroach, there are probably more,” he said. “Everyone should be forewarned on this.”
