U.S. bank shares tumbled on Thursday as investors grew increasingly anxious about risks tied to two auto-related bankruptcies that have shaken confidence in the financial sector. Zions Bancorporation, Western Alliance, and Jefferies Group led the declines, sparking fears of broader credit exposure across regional lenders.
Zions’ stock dropped 12% after the bank said it would record a $50 million third-quarter loss from two commercial and industrial loans issued by its California unit. Western Alliance slid nearly 11% after revealing it had filed a lawsuit alleging fraud by Cantor Group V, LLC. Jefferies fell 9% following disclosures that it had exposure to bankrupt auto parts supplier First Brands. The investment bank’s stock has now lost more than 20% since the bankruptcy was announced.
“It shows you can’t take credit quality for granted, and poor performing credit quality at one bank can drag down the group quite fast,” said Stephen Biggar, a banking analyst at Argus Research.
Jefferies’ investor day, which was closed to the media, left some uncertainty among analysts. Morgan Stanley’s Ryan Kenny said in a note that while the event highlighted strength in Jefferies’ core business, it “left some questions unanswered on what exactly went wrong with First Brands and whether or not JEF could have mitigated risk in advance.” Jefferies and Zions declined to comment.
Sean Dunlop, an analyst at Morningstar, said investors appeared to be reacting with panic rather than analysis. “It appears that investors are electing to sell first and ask questions later regarding Jefferies, a selloff that soon threatens to be overdone,” he said.
The broader market also took a hit. The regional banking index fell 5.8%, and the S&P 500 slid nearly 1% as concerns about credit quality spread. Analysts drew comparisons to last year’s bankruptcy of First Brands, which exposed oversight lapses among lenders and highlighted vulnerabilities in the private credit market.
Adding to the anxiety, JPMorgan Chase CEO Jamie Dimon warned earlier this week that recent bankruptcies, including subprime auto lender Tricolor, have raised red flags about credit market transparency. JPMorgan wrote off $170 million in the third quarter related to Tricolor’s collapse and said it is reviewing its internal controls. “When you see one cockroach, there are probably more, and so everyone should be forewarned,” Dimon said.
The turmoil comes more than two years after the 2023 failure of Silicon Valley Bank, when surging interest rates caused major losses and triggered a banking panic that spread to Signature Bank days later.
Zions said it expects to take its $50 million charge in the third quarter and has filed a lawsuit in California to recover the loans. Western Alliance’s complaint accuses Cantor Group V of forging title policies tied to property liens on several loans. Attorneys for Cantor denied the claims, calling them “unfounded” and asserting confidence that the evidence will clear their clients.
Western Alliance said it would provide additional context about its business model and credit structures during its October 21 earnings release, adding that its total criticized assets had fallen since June.
While some analysts view the problems as isolated cases rather than signs of systemic weakness, others caution that looser lending conditions could expose more vulnerabilities. “In times of loose credit, you are going to have more instances of fraud,” said Wells Fargo analyst Mike Mayo. “Right now, credit in general is fine, but there’s a heightened need to watch the recent issues.”
The recent market reaction underscores growing investor unease as banks confront rising credit risks and lawsuits tied to bankrupt borrowers, testing the resilience of the U.S. financial system once again.
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