Clouds of fraud suspicion loom as U.S. regional bank preferred stocks become the "eye of the storm"

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Preferred shares of U.S. regional banks are facing their worst sell-off pressure since the collapse of Silicon Valley Bank, as investor confidence in the sector has quickly crumbled following the disclosure of fraud incidents.

Zions Bancorp and Western Alliance Bancorp revealed on Thursday that they had encountered loan fraud, causing both banks’ share prices to plunge 10%. Zions’s preferred shares tumbled 6.36% that day to $20.38, hitting an 18-month low and marking the biggest drop since May 2023; Western Alliance’s preferred shares fell 2.87% to $20.83, the largest drop since April 2024, and bid prices indicate a further decline on Friday.

These disclosures come at a time when the market is already highly jittery due to the bankruptcy of auto lender Tricolor Holdings and auto parts supplier First Brands Group. JPMorgan CEO Jamie Dimon has recently warned of a “cockroach effect” in the credit sector, prompting traders to remain highly vigilant and to adopt a sell-now-ask-questions-later strategy in the face of bad news.

The memories of the sell-off triggered by the 2023 regional banking crisis remain fresh, further amplifying current panic. The crisis began with the collapse of Silicon Valley Bank and quickly spread to other lending institutions.

Fraud Incidents Spark Sector Divergence

The two banks stated they encountered fraud when issuing loans to funds investing in distressed commercial mortgages, causing significant divergence in the preferred share market.

Media-compiled data show that preferred shares of the so-called six major money-center banks were virtually unaffected on Thursday—both the $1,000 and $25 par securities remained stable. In contrast, preferred shares issued by smaller banks suffered a more severe blow, with $25 par value retail market preferreds averaging a 0.7% decline.

Zions Bancorp’s 4.819% perpetual preferred shares fell to $20.38, and Western Alliance’s 4.25% securities of the same grade dropped to $20.83.

Credit Quality Concerns Emerge

Suvi Platerink Kosonen, Senior Financial Analyst at ING Bank, noted in a report on Friday that while these are individual cases, they do raise alarms over potential credit quality—suggesting that large sums of money chasing assets may lead to insufficient risk management focus.

Although the tens of millions in fraud losses disclosed by Zions and Western Alliance are much smaller in scale than the collapses of First Brands and Tricolor, these incidents have reignited debate on Wall Street about whether the easy-money era faces a reckoning.

U.S. banks issue preferred shares to raise supplementary capital, in a manner similar to the way foreign banks issue more complex Additional Tier 1 bonds.

Shadows of the 2023 Silicon Valley Bank Crisis Reappear

The 2023 Silicon Valley Bank crisis stemmed from the Federal Reserve’s rate hikes, which pressured the bond portfolios of SVB and other regional banks.

When depositors began withdrawing funds, SVB was forced to sell assets at huge losses, ultimately leading to its collapse. The resulting spiral quickly spread to other banks, as panicked investors indiscriminately sold off lender stocks.

The current market reaction shows that vigilance toward the regional banking sector remains high—any negative news could trigger a similar chain reaction.

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