U.S. regional banks are in crisis again, Goldman Sachs calls it "crazy," and these are the three questions clients care about most!

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U.S. regional bank stocks suffered a steep plunge on Thursday, marking their second worst trading day since the collapse of Silicon Valley Bank in March 2023. This was followed by a surge in client inquiries to Goldman Sachs traders, with investors most concerned about three core issues.

The crisis was triggered when Zions Bancorporation disclosed a $60 million provision for two loans and a $50 million write-off, representing 5% of its expected 2025 market earnings. Court documents indicate this is the third suspected fraud case exposed in a month and a half, following First Brands and Tricolor, echoing JPMorgan CEO Dimon's warning that "there is never just one cockroach."

Mike Washington, a Goldman Sachs trader, wrote in his latest daily market summary that client calls to the trading desk inquiring “what exactly happened” are at high levels. Investors are focused on how these loans passed approval processes, why three unrelated suspected fraud cases have been exposed within a month and a half, and whether small banks relaxed underwriting standards to boost loan growth.

Market anxiety is spreading from the private credit sector to regional banks, with investors dumping financial stocks. U.S. regional banks collectively fell 7%, money center banks dropped 3.9%, Zions shares plunged 13%, Jefferies fell 10.6%, Capital One dropped 6% due to credit exposure, and alternative asset managers fell 5%.

Goldman Sachs pointed out that such a dramatic market reaction to a single borrower's disclosure “seems a bit crazy,” but clients now say “it’s three already.” Many regional banks have not yet released earnings reports. Goldman’s financial expert Christian DeGrasse noted that before answers are available, the market remains highly cautious about regional banks' NDFI (non-depository financial institution) loan exposures.

Single Loss Triggers Chain Reaction

Zions Bancorporation disclosed via an 8-K filing that its California Bank & Trust division suffered defaults on commercial loans made to two borrowers. Goldman Sachs analysis shows the $50 million write-off translates to 7 basis points of the bank’s core tier-one capital, about 5% of its expected 2025 earnings.

The documents show the bank uncovered “clear misrepresentations and contractual breaches” as well as “other violations” by borrowers and guarantors in its internal review. The subsequent default notices and acceleration demands were not answered. Zions has filed suit against the guarantors in California seeking full recovery and plans to hire external counsel for an independent review.

Court filings show Western Alliance Bank is also involved in a lawsuit against the same borrower, seeking to recover $100 million. This finding prompted investors to quickly assess other regional banks’ NDFI exposures, spreading concerns throughout the sector.

The Three Core Questions Investors Care Most About

Feedback from Goldman’s trading desk indicates the market isn’t worried about contagion from a single credit event but is focused on three deeper issues.

First, how did these loans get through the approval process? This question targets not only regional and commercial banks, but also investment banks like Jefferies. Jefferies held an Investor Day that day, where some investors expressed dissatisfaction with management’s handling of First Brands and Point Bonita exposures; its stock fell 10.6%.

Second, why have three unrelated suspected fraud cases come to light in just a month and a half? Goldman noted this is a “very important question,” making investors feel “something is off.” The three cases—Tricolor, First Brands, and the newly disclosed Zions borrower—all involve different entities.

Third, did small banks loosen underwriting standards to spur loan growth? This is particularly worrying as it matches investor narratives about a broader deterioration in the credit environment. These problem loans mainly come from NDFI exposures, which have become an increasing source of loan growth for regional banks, typically accounting for about 15% of total loans.

NDFI Loans Become Key Focus

Goldman Sachs' Ryan Nash reported in the Q2 2025 handbook that NDFI loans account for about 15% of regional bank portfolios, but individual bank situations vary widely. These loans cover various financings to non-depository financial institutions, including private credit funds and consumer credit intermediaries.

Trading performances that day showed significant differences in NDFI underwriting quality among banks. Large banks outperformed small and regional banks by about 300 basis points, with gaps in some instances as wide as 1,000 basis points. Investors emphasized that not all NDFI loans are the same, and underwriting standards differ across banks.

The current market focus is on private credit exposures within NDFI loans, followed by exposures to consumer credit intermediaries. Goldman noted the market seems to be in a “discovery phase”—nobody knows exactly what is happening, but investor conversations have clearly shifted to a tone of “something seems to be going on.”

More Risks May Be Exposed During Earnings Season

Goldman Sachs noted that while the new disclosure involved only one borrower (even though clients say “it’s three now”), market sentiment has changed significantly—from wait-and-see to “there does seem to be a real problem.”

Goldman trader DeGrasse said, “All this seems a bit crazy after a single borrower’s new disclosure,” but clients’ tone of conversation has clearly changed. ZION has stated that although it believes this is an isolated incident, it plans to hire external counsel for an independent review.

Many regional banks have not yet reported earnings. Goldman expects NDFI loan exposures to become a focal point in upcoming earnings conference calls and disclosures. Goldman emphasized that not all NDFI loans are the same and underwriting standards differ among banks, as evidenced by the large divergence in bank stock performances that day.

The market is closely watching the forthcoming earnings season to judge whether this credit problem is an isolated incident or a broader systemic risk.

Risk Warning and DisclaimerThe market carries risk, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account the unique investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are applicable to their own circumstances. Those who invest based on this article do so at their own risk. ```