Markets were spooked by issues at two regional lenders that look like credit problems, but investors may be missing a bigger picture—Federal Reserve policy that should both support banks and boost stocks.
Bank shares were derailed Thursday when Zions Bancorp and Western Alliance flagged problems with loans. It came eerily a few days after JPMorgan CEO Jamie Dimon said credit risks were like pests: “When you see one cockroach, there’s probably more.”
There may be a link between loan issues at Zions and the bankruptcies of two auto companies last month, including subprime lender Tricolor Holdings.
This raises two questions. One was highlighted by the IMF this week: how much risk has built up in nonbank lenders? More pointed is whether Tricolor’s troubles mean lower-income borrowers are struggling—an economic red flag.
Investors have panicked in part because warnings from Zions and Western Alliance are a reminder of the 2023 collapse of Silicon Valley Bank. That failure came near the peak of quantitative tightening, which shrinks bank reserves, but the Fed has recently signaled it will soon finish its monetary
tightening cycle, easing pressures.
The Fed is also on track to keep cutting interest rates, which will benefit lower-income borrowers—and stocks. Remarks from central bankers this week reiterated more rate cuts
are coming, and futures markets have priced in 50 basis points of rate reductions this year.
Both of these factors suggest bank fears may be overplayed.
More immediately, this looks like further market chop amid a government shutdown that has limited the release of official economic data. This has left stocks to whipsaw as investors search for signals and find only noise from
trade tensions, AI trends—and now bank stresses.
Investors would do best to keep an eye on cockroaches but not burn the house down prematurely.
—Jack Denton
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More Credit ‘Cockroaches’ Could Be Lurking At Banks
Investors are worried about a bumpy road ahead for credit markets, with regional banks a particular focus. Disclosures by Zions Bancorp and Western Alliance on Thursday ratcheted up the fears, which were already elevated by the bankruptcies of two auto-related companies last month.
- Zions said it recently became aware of legal actions initiated by several banks against parties affiliated with two of its borrowers, and is taking a $50 million third-quarter charge-off as part of a $60 million provision related to the loans. Some speculate the borrowers are the bankrupt auto-related companies Tricolor and First Brands.
- Western Alliance also came under scrutiny for its loans to non-depositary financial institutions. In a securities filing it reaffirmed its full-year guidance. But after it sued a borrower in August, it said Thursday that existing collateral should cover the borrower’s obligation.
- The KBW Regional Bank index fell 6.3%. Jamie Dimon, CEO of the biggest U.S. bank JPMorgan said this week that credit risks are like cockroaches, you see one, there are likely more. And IMF managing director Kristalina Georgieva expressed concern during the IMF/World Bank meetings in Washington.
- It doesn’t appear either bankrupt company holds wider implications about the economy. For Tricolor, some worry that its lower-income consumers may have fallen behind on interest
payments, potentially a signal the lower-end of the economy is buckling, Sevens Report’s Tom Essaye says.
What’s Next: Evercore ISI analyst John Pancari sees Zion’s announcement as the latest credit issue related to fraud or bankruptcies within the non-depository financial institution space, and expects it to stay top of mind for investors and to fuel “added apprehension around bank
NDFI exposures.”
—Teresa Rivas and Janet
H. Cho
In U.S.-China Rivalry, Hard Line Postures But Open to Talks
The U.S.-China rivalry exploded this past week with a trade version of “he started it first.” Both countries took a hard line against each other while stressing they still wanted to talk. It was China’s turn on Thursday, disputing U.S. descriptions of its actions.
- China’s Ministry of Commerce wants the U.S. to reconsider President Donald Trump’s threats of additional 100% tariffs on Chinese goods and other restrictions. A spokesperson defended China’s recent moves, including yet-to-be implemented export restrictions on critical minerals.
- Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer have described China’s new export restriction regime as trying to put a chokehold on the global supply chain of materials used for everything from laptops to defense equipment, while China says this is a distortion of its measures.
- The Ministry of Commerce clarified its controls are limited to rare earth magnets and related components already on its restricted exports list and said all compliant export applications for nonmilitary use would be approved. That clarification could help de-escalate tensions.
- That said, these types of export controls—not tariffs—lie at the center of the U.S.-China trade conflict and are unlikely to be resolved anytime soon, as both sides use them as a source of leverage in their growing rivalry.
