The problems at the two local banks that caused Thursday’s stock market decline may have been unique, but one thing is clear: Wall Street is now wary of systemic credit risks, just in case. Concerns about the health of regional banks sent stock prices lower on Thursday, with the Dow Jones Industrial Average dropping more than 300 points. The SPDR S&P Regional Banking ETF (KRE) fell more than 6%. Shares of the two banks at the center of the turmoil, Utah’s Zions Bancorp and Arizona’s Western Alliance, fell 13% and more than 10%, respectively. Initial thinking from bank analysts suggests these events may be a one-off. Analysts say what happened with Zions and Western Alliance appears to be related to a small number of bad creditors, rather than the broader risks to private credit posed by the recent bankruptcies of First Brands and Tricolor Holdings. (On Friday, Baird upgraded Zion stock from neutral to outperform, saying Zion Bank had been unfairly punished. The stock remains the consensus among other Wall Street analysts.) However, the rapid emergence of non-performing loans and the slow reaction of the stock market indicate that investors are wary of increasing risks. This was brought to light this week by JPMorgan CEO Jamie Dimon, who said there could be more cockroaches in the industry after the country’s largest bank took a huge write-off in the third quarter due to its exposure to the tricolor. “If you asked Jamie Dimon about these issues, he’d say, ‘If you see one cockroach, there’s probably a few more,'” said Mike Mayo, a Wall Street banking analyst. “So I think investors are looking around for cockroaches and that’s what’s happening now.” NFDI A broader concern is the amount of loans to non-deposit financial institutions (NDFIs). NDFIs, which include mortgage companies, insurance companies, and private asset management companies, offer borrowers an alternative source of financing beyond traditional banks. However, NDFIs are not as transparent as regulated or regular banks. This means that unknown leverage risks can impact the broader financial system. Commercial banks’ lending to NDFIs in 2025 will increase by more than 50% from the previous year, the largest change in the data since 2016, according to the Federal Reserve. “The scary element of this story is that the lending criteria for NDFIs is not as stringent. You have to assume there will be a lot more lending,” said Peter Cawley, chief market strategist at Pave Finance, who cited a huge spike in lending to NDFIs. “The fact that private credit is so opaque risks creating a big wave of concern without actually knowing if there is a problem.” “The argument that Tricolor and First Brand were siled events loses credibility as soon as the news about Zions and Western Alliance Bancorp breaks,” Cawley said. “It’s going to get worse with the coming news.” Additionally, private credit is also an untested asset class amid the economic downturn, highlighting the importance of future jobs data, which is currently on hold due to the government shutdown. Believers in the personal wealth story are not expecting systemic risk from recent news. MacRae Sykes, portfolio manager of Gabelli Financial Services Opportunities ETF (GABF) at Gabelli Funds, said the current macroeconomic backdrop is favorable for banks, including lower interest rates, stronger animal spirits and a still strong economy. “We think it’s a pretty good environment to own a bank,” Sykes said. “But, of course, you have to do your homework on the individual’s leadership and underwriting history to make sure there are no mistakes and make sure you’re comfortable with their portfolio and balance sheet.” He remains bullish on large money centers such as JPMorgan and Wells Fargo, as well as some regional financial centers such as First Citizens Bank and M&T Bank. Nevertheless, investors are now wary of risks that could arise from unintended consequences of bad debts. “This just shows that if an incident were to occur, the chances of an error occurring are low,” Mayo said. —CNBC’s Gabriel Cortez and Chris Hayes contributed to this report.
