Fear over credit quality in US regional banks rippled through markets today, dragging global financial stocks lower and reviving memories of the crisis of confidence that shook sentiment just over two years ago.
The selloff hit Wall Street, with main equities indexes seeing a mixed open, as investors stayed on edge with banking sector worries adding to anxiety already heightened by escalating US-China trade tensions and renewed worries about the global economic outlook.
The banking sector's exposure to two recent US auto bankruptcies has rekindled concerns about lending standards more than two years after Silicon Valley Bank's failure, when high interest rates drove paper losses on its bonds and sparked aglobal bank stocks rout.
Investors are now trying to assess whether recent issues in US credit markets will have a similar effect, as an overnight selloff on Wall Street rippled across Asia and Europe and shone a spotlight on the recent AI-led surge in broader stock markets that some fear could have created a bubble.
Some analysts said, at this stage, the concerns around US regional banks appeared idiosyncratic rather than a sign of something more systemic.
"Pockets of the US banking sector including regional banks have given the market cause for concern," said Russ Mould, investment director at AJ Bell.
"This includes Zions flagging an unexpected loss on two loans and Western Alliance alleging a borrower had committed fraud," he added.
Some of the largest US banks fell in Friday trading, closing a week marked by broadly strong earnings on a dour note. The KBW Banks Index, which tracks large-cap banks, fell 0.4%.
White House economic adviser Kevin Hassett said today that banks have ample reserves and that he was optimistic that credit markets could 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 Federal Reserve's Michelle Bowman are "cleaning things up right now" without providing further details.
"What we see in the banks selling off overnight in the US,Asia wakes up to it, Europe wakes up to it, and so it spreads," said TD Securities head of global macro strategy James Rossiter.
European banks fell almost 3%, with Deutsche Bank and Barclays sliding around 6%, and Societe Generale down 4.6%, after financial firms in Asia ,especially Japanese banks and insurers sank.
In US trading, the SPDR S&P regional banking ETFwas up 0.4%, a day after the benchmark tumbled 6%, its steepest one-day selloff in six months.
Strong earnings from Truist Financial, Regions Financial, and Fifth Third bolstered investor sentiment, sending most US regional banks higher in early trade.
Zions Bancorp, at the heart of the investor scrutiny, recovered some lost ground, after closing down 13%. Western Alliance was up 2.6% after losing roughly 11% yesterday.
"Despite growing hopes of further rate cuts this year, attention is turning to the underlying health of the economy, as emerging credit losses amongst America's regional banks raised further questions about lending practices," said Derren Nathan, head of equity research, Hargreaves Lansdown.
The US KBW Regional Banking Index closed down 6.3% yesterday. The latest selloff came after Zions said it would take a $50m loss on two commercial and industrial loans from its California unit, while Western Alliance disclosed it had initiated a lawsuit alleging fraud by Cantor Group. Attorneys for Cantor denied the allegations.
Credit impairments in private debt have been rising and default rates have hit 5.5%, said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, citing the latest available data for the second quarter. Despite tenuous gains in US bank stocks, the gloom spread across other pockets of the US financial sector, weighing on mortgage lenders, buy-now-pay-later firms, and brokerages.
Analysts say that any cracks in credit on Wall Street are likely to spill over into other areas of the financial sector. Robinhood and Interactive Brokers fell 1.5% and 2%, respectively.
JPMorgan Chase CEO Jamie Dimon said earlier this week about credit markets: "When you see one cockroach, there are probably more, and so everyone should be forewarned."
Broader market impact
"The market is clearly priced for perfection," said Bo Pei, 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 shares are up some 40% year-to-date. Gold meanwhile hit a fresh record high.
US banks borrowed nearly $15 billion from the Federal Reserve's Standing Repo Facility (SRF) on Wednesday and Thursday, suggesting tightness in meeting funding obligations with large net Treasuries settlement due this week.
That was the largest borrowing over a two-day period since the Covid-19 pandemic.
Banks, however, did not tap the repo facility this morning, although they get another chance to do so in the afternoon.
The SRF acts as a liquidity backstop for potential funding shortfalls. Introduced in July 2021 in response to the pandemic, the Fed's facility provides twice-daily overnight cash loans in exchange for eligible collateral such as US Treasuries.
"The market has been concerned on a bubble brewing on private credit for the past few months," said Alan Devlin, Global Financials Research Analyst, Impax Asset Management. "The market is basically shooting first, asking questions later."
