Wall Street is on edge regarding the stability of regional banks in the United States, following recent disclosures of bad loans made by several institutions. Over the past two weeks, banks such as Zions Bank, Western Alliance Bank, and Jefferies revealed their struggles with various unprofitable investments, which has led to a notable decline in their stock prices and raised concerns among investors about potential further negative developments.
JPMorgan Chase's CEO Jamie Dimon contributed to this climate of uncertainty, remarking that the appearance of financial troubles can indicate deeper underlying issues within the banking sector. "When you see one cockroach, there are probably more," Dimon stated during a press conference on Tuesday, coinciding with JPMorgan's financial results announcement. This comment underscores the fear that regional banks may be facing a recurrence of problems similar to those observed in the past.
The KBW Bank Index, which tracks the performance of various banks, has experienced a 7% drop this month alone, reflecting investor anxieties over the sector's viability. Evidence of distress among banks has become more pronounced, particularly with data from the Federal Reserve indicating that several banks recently utilized the central bank's overnight "repo" facilities—an action not seen since the Covid-19 pandemic. This facility enables banks to leverage highly liquid securities like mortgage bonds and treasuries into cash, which can be critical for addressing short-term liquidity challenges.
Zions Bancorp's shares plummeted after the bank reported a $50 million write-off related to commercial and industrial loans. Meanwhile, Western Alliance Bank's stocks fell after it accused an entity known as Cantor Group V LLC of fraud. Additionally, Jefferies disclosed that it was holding $5.9 billion in debt connected to First Brands, a bankrupt auto parts company. While these banks experienced a slight recovery by midday Friday, the damage had already been done.
Even larger Wall Street banks are not immune to the ramifications of these troubles. Several institutions have reported losses stemming from the bankruptcy of Tricolor, a subprime auto dealership that collapsed last month. Among these, Fifth Third Bank, a significant regional bank, faced a loss of $178 million associated with Tricolor's downfall.
Although larger Wall Street banks often dominate media attention, regional banks play a crucial role in the economy by providing loans to small and medium-sized businesses and serving as key lenders for commercial real estate projects. There are approximately 120 banks with assets ranging from $10 billion to $200 billion as per the FDIC, underscoring their economic significance.
These regional banks, despite their size, can encounter difficulties because their business models are not as diversified as those of larger money-center banks. They tend to have higher exposure to real estate and industrial loans and may lack substantial involvement in credit card and payment processing sectors, which can offer alternative revenue sources during downturns in lending.
The previous banking crisis in 2023 also notably affected mid-sized and regional banks that were overly reliant on low-interest loans and commercial real estate investments. This instability culminated in the failure of Silicon Valley Bank and Signature Bank, and the forced sale of First Republic Bank to JPMorgan Chase. Throughout this turbulent period, banks such as Zions and Western Alliance witnessed significant drops in their stock prices.
