Fears over the quality of loans at regional U.S. banks swept through markets on Friday, sending global financial stocks lower for a time before they recovered their losses and reviving memories of the crisis of confidence that rocked sentiment just over two years ago.
The sell-off hit Wall Street's major indexes as futures fluctuated, adding to investor worries already heightened by escalating U.S.-China trade tensions and renewed concerns about the global economic outlook.
The banking sector's exposure to two recent U.S. auto bankruptcies has reignited concerns about lending standards more than two years after the Silicon Valley bank collapsed when high interest rates led to paper losses on its bonds and triggered a collapse in global bank shares.
Investors are now trying to gauge whether recent troubles in U.S. credit markets will have a similar effect, as the overnight sell-off on Wall Street rippled across Asia and Europe and shed light on a recent artificial intelligence-fueled surge in broader stock markets that some fear could create a bubble.
Some analysts say that at this stage, concerns about U.S. regional banks seem more idiosyncratic than a sign of something more systemic.
“The pockets of the US banking sector, including regional banks, have given the market cause for concern,” said Russ Mould, investment director at AJ Bell.
They include Utah-based Zions Bancorporation, which reported unexpected losses on two loans, and Arizona-based Western Alliance, which alleges the borrower committed fraud.
Financial stocks crashed around the world
Shares of some of the largest U.S. banks fell in market trading on Friday, ending a week of strong earnings for Wall Street's top banks on a pessimistic note.
Shares of Bank of America and Citigroup fell 0.33% and 0.4%, respectively.
“What we're seeing in the overnight bank sell-off in the U.S., Asia is waking up to it, Europe is waking up to it, and it's spreading,” said James Rossiter, head of global macro strategy at TD Securities.
European banks fell nearly three percent, Deutsche Bank and Barclays fell about six percent and Societe Generale fell 4.6 percent after financial firms in Asia, especially Japanese banks and insurers, went bust.
Zions Bancorp, which has been on investors' radar, regained some of its lost ground after closing down 13 percent on Thursday. Western Alliance shares also rose 1.2% in early pre-market trading after losing about 11% on Thursday.
“Despite rising hopes for further rate cuts this year, attention is turning to the underlying health of the economy as emerging credit losses among America's regional banks raise further questions about lending practices,” said Derren Nathan, head of equity research at Hargreaves Lansdown.
Investors fear risks in private lending
The latest sell-off comes after Zions said it would take a $50 million loss on two commercial and industrial loans from its California unit, while Western Alliance said it had filed a lawsuit alleging fraud by Cantor Group V, LLC. Cantor's lawyers have denied the allegations.
Such disclosures typically do not impact broader markets but have attracted attention as they follow the collapse of two US companies, FirstBrands and Tricolor.
The setbacks have alarmed investors who are concerned about the risks of private lending, a fast-growing but less regulated market where companies have borrowed heavily in the past few years.
The gloom has spread to other parts of the financial sector, weighing on mortgage lenders, buy-now-pay-later firms and brokerages.
Analysts say any credit problems on Wall Street are likely to spill over into other areas of the financial sector.
Shares of buy now pay later lenders Affirm and Klarna fell 2.3% and 0.4%, respectively, while consumer finance company SoFi was down 1.3%. Shares of Robinhood and Interactive Brokers each fell 2.6%.
Earlier this week, JPMorgan Chase CEO Jamie Dimon had this to say about credit markets: “When you see one cockroach, there are probably more, so everyone should be warned.”
Wider market impact
“The market is clearly priced for perfection,” said Bo Pei, an analyst at US Tiger Securities. “This makes sentiment vulnerable, so even isolated negative headlines can cause an overreaction like the one we saw yesterday.”
European bank shares are up about 40 percent year to date and global stocks are up 16 percent as investors flock to companies that could benefit from the artificial intelligence boom.
Meanwhile, gold hit a new all-time high, marking its best week in more than 17 years.
“The market has been concerned about the brewing private credit bubble over the past few months,” said Alan Devlin, global financial analyst at Impax Asset Management. “The market essentially shoots first and asks questions later.”
