"Subprime crisis" or "overreaction"? U.S. small banks "explode," and the market "sells first and asks questions later."

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Fraud cases disclosed by two U.S. regional banks have triggered market panic, and a sell-off targeting regional banks is spreading on Wall Street, as investors adopt a “sell first, ask questions later” approach amid concerns over credit risks.

Zions Bancorp and Western Alliance Bancorp, two American regional banks, disclosed on Thursday that they suffered losses due to fraud involving troubled commercial mortgage investment funds. Although the loss amounts are relatively small compared to other recent credit events—only tens of millions of dollars—the market reaction has been unusually severe.

Affected by this news, the S&P Regional Banks Select Industry Index plummeted 6.3% on Thursday, marking its worst single-day performance in months. Zions shares plunged by 13%, and Western Alliance dropped 11%. The panic spread rapidly, dragging down the entire banking sector: the combined market capitalization of 74 major U.S. banks lost over $100 billion in a single day.

This chain reaction highlights the market’s fragile nerves, as investors worry this may be just the tip of the iceberg.

JPMorgan CEO Jamie Dimon’s recent “cockroach” warning—“When you see one cockroach, there may be more”—still lingers. JPMorgan analysts noted that banking is a sector where investors tend to “sell first, ask questions later,” and the rapid deterioration of market sentiment has become a bigger concern than banks’ actual balance sheets.

Trigger: Two Banks Report Loan Fraud

The direct cause of this market turmoil is two related allegations of loan fraud.

According to disclosures from Zions and Western Alliance, they provided loans to investment funds associated with Andrew Stupin and Gerald Marcil, used to acquire troubled commercial mortgages.

According to Zions, its wholly owned subsidiary California Bank & Trust provided a $60 million loan to borrowers, and set aside $50 million in bad loan provisions. A legal document from the bank reveals that an investigation found many notes and related mortgaged properties had been transferred to other entities. Western Alliance also stated it had lent to the same batch of borrowers.

In response, Brandon Tran, lawyer for Andrew Stupin and Gerald Marcil, said in an email statement that the allegations against his clients were “baseless” and distorted the facts. He stated, “We believe that once all the evidence is presented, our clients will be completely exonerated.”

Market Panic: “Sell First, Ask Later” Becomes Consensus

Although the losses reported by the two banks are not huge, recent credit “explosions” have already shaken the market.

Last month, subprime auto lender Tricolor Holdings filed for bankruptcy; soon after, auto parts supplier First Brands Group—which owed over $10 billion to Wall Street giants—also declared bankruptcy. Against this backdrop of bad news, the fraud allegations at Zions and Western Alliance became the straw that broke the camel’s back.

Investors’ underlying anxiety was instantly ignited, even as the S&P 500 hovered near record highs. Wells Fargo Managing Director Mike Mayo said, “When the credit markets are this buoyant, there’s little room for error—good times are when bad debts accumulate. So I think today, caution has outweighed optimism.”

This “sell first, ask later” mindset spread rapidly. JPMorgan analysts Anthony Elian and Michael Pietrini noted in a report that they are questioning why all these credit ‘isolated incidents’ seem to be happening in such quick succession.

Thursday’s sell-off did not spare big banks. Shares of Citigroup and Bank of America each fell more than 3%.

Several large banks said they were impacted by recent high-profile bankruptcies—JPMorgan and Fifth Third Bancorp disclosed a combined loss of several hundred million dollars related to Tricolor, and Jefferies Financial Group disclosed exposure to First Brands. JPMorgan lost $170 million due to Tricolor.

History Repeats? The Shadow of the 2023 Banking Crisis

The magnitude of the market reaction is largely due to the painful memory of the 2023 banking crisis, which began with the collapse of Silicon Valley Bank (SVB) and once swept through the entire U.S. banking sector.

Matt Maley, Chief Market Strategist at Miller Tabak & Co LLC, said: “The run on regional banks two-and-a-half years ago is still fresh in investors’ minds. Therefore, after this week’s news about Zions and Western Alliance, credit quality is now the top concern for those watching this group.”

The 2023 crisis was rooted in Fed interest rate hikes that pressured banks’ bond portfolios. Bank runs forced lenders to sell assets at losses, ultimately triggering failures and a chain reaction.

However, some analysts believe it is too early to say history is repeating itself. Charles Schwab Chief Strategist Steve Sosnick pointed out: “It’s too soon to declare this another SVB moment. However, given the severity of that disaster, it makes sense that bank stock investors are cautious toward anything even resembling such a situation.”

The difference in risk resistance between large and regional banks is becoming more evident.

Wells Fargo Managing Director Mayo said: “The biggest banks have strong diversification that allows them to absorb these issues, while small banks have a much narrower margin for error.” In the coming weeks, as regional banks release earnings reports, investors will scrutinize their credit quality and loss provisions; any surprises could trigger sharp market swings again.

Risk Disclaimer and Terms of LiabilityThe market has risks; investments should be made cautiously. This article does not constitute personal investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are appropriate to their circumstances. Investment decisions made accordingly are at their own risk. ```