Bank Stocks Tumble Over Bad Loans—Are There More 'Cockroaches' Hiding in the Financial Kitchen?

Zions Bancorp stock fell 13% after it said it would write off $50 million of loans compromised by alleged fraud.

Kim Raff / Bloomberg / Getty Images

Key Takeaways

• Regional bank stocks experienced a significant decline on Thursday, following the announcement from Zions Bancorp regarding its decision to write off loans to two borrowers it has accused of engaging in fraudulent activities. This development sent shockwaves through the financial markets, as investors reacted to the implications of such a write-off, which not only affects the bank's immediate financial health but also raises questions about the integrity of its lending practices and the potential for similar issues within the broader banking sector.

• The write-off by Zions Bancorp has intensified existing concerns within the financial community regarding lax lending standards that have been observed in recent years. Many analysts and investors are increasingly worried about the potential for undisclosed entanglements among non-bank financial institutions, which have become more intertwined with traditional banks as the two sectors have dramatically increased their collaborative business efforts. This growing relationship raises alarms about the transparency and risk management practices within these institutions, leading to fears that the financial system may be more vulnerable to shocks than previously thought.

• Adding to the anxiety on Wall Street are the recent bankruptcies of notable companies such as auto parts maker First Brands and subprime auto lender Tricolor. These failures have heightened fears that they may be indicative of a broader trend, suggesting that additional credit-related losses could be looming on the horizon. The implications of these bankruptcies are significant, as they not only reflect the challenges faced by these specific companies but also signal potential weaknesses in the credit markets, particularly for sectors heavily reliant on consumer financing. Investors are now left to grapple with the possibility of further disruptions and the potential for a ripple effect throughout the economy.

Excitement surged in the market on Thursday as regional bank stocks took a hit after Zions Bancorp announced it would write off fraudulent loans made to two borrowers. This news added to the buzz among investors about lending standards and the dynamics in credit markets!

Zions Bancorp (ZION) made waves on Thursday by revealing it had recently uncovered “what it believes to be apparent misrepresentations and contractual defaults” by two borrowers. As a bold move, it plans to write off $50 million of the $60 million outstanding on these loans.

In an electrifying turn of events, shares of Zions dropped 13% on Thursday, setting the stage for regional banks to follow suit. The KBW Regional Banking Index saw an exciting 6% decline! 

Recent Bankruptcies Sound the Alarm!

The recent bankruptcies of two companies in the auto sector—car dealer Tricolor and auto parts maker First Brands—have drawn significant attention to potential credit market risks. Tricolor is accused of fraudulently pledging risky subprime loan portfolios to multiple creditors, while First Brands allegedly borrowed against invoices to conceal the true extent of its debt. 

Regional lender Fifth Third Bancorp (FTB) announced in a regulatory filing in early September that it would incur a $170 million charge due to the collapse of subprime auto lender Tricolor. JPMorganChase (JPM) also wrote off $170 million in Tricolor-related loans in the third quarter. Meanwhile, Raistone, which facilitates short-term business loans, reported that $2.3 billion has “simply vanished” as a result of First Brands’ failure.

The dual bankruptcies have sparked excitement and anticipation on Wall Street, with some speculating that more credit losses might be on the horizon. “I probably shouldn’t say this, but when you see one cockroach, there are probably more,” exclaimed JPMorgan CEO Jamie Dimon on Tuesday, following the release of a fantastic earnings report from the banking giant. 

"I expect it to be a little bit worse than other people expect it to be," Dimon added enthusiastically, pointing out that private credit underwriting standards "may not be as good as you think."

The Unique Risks of Lending to Non-Bank Financial Institutions

Zions’ filing on Thursday has intensified the buzz around transparency in the banking system, especially concerning lending to non-depositary financial institutions (NDFIs), often known as non-bank financial institutions. NDFIs—a dynamic category that includes hedge funds, insurers, and lenders of mortgages and consumer loans—provide financial services without taking deposits, and thus don’t qualify as a bank and are not regulated as such. 

Bank lending to NDFIs has skyrocketed over the last decade. Since the financial crisis of 2008-2009, bank loans to NDFIs have surged at nearly three times the rate of the next-fastest growing loan category, according to the Federal Deposit Insurance Corporation’s 2025 risk review.

NDFI lending presents an intriguing challenge to banks. “It can be particularly difficult for banks to assess the credit decisions and management of loans originated by private credit firms,” according to the FDIC. Moreover, “loans originated outside the banking system are not subject to the same safety and soundness standards as bank loans, which could lead to higher-risk lending across the financial system.” 

Best Regards,

Stock Market Charlie