Global bank stocks fall on credit worries as US lenders rebound slightly

Fears over bad loans at US regional banks rippled through global markets on Friday, dragging financial stocks in Europe and Asia before the sector rebounded in New York following strong earnings. 

The selloff hit Wall Street, with main equities indexes seeing a mixed open, as investors stayed on edge about the banking sector. The concerns added to anxiety about escalating US-China trade tensions and the global economic outlook. 

The banking sector's exposure to two recent US auto bankruptcies has rekindled concerns about lending standards more than two years after Silicon Valley Bank's failure triggered broader turmoil. 

"There is a nervousness now after the First Brands and TriColor bankruptcies, then a third issue seems to confirm fears that there are a lot of subprime assets," said Brian Mulberry, senior client portfolio manager at Zacks Investment Management. 

"It appears that these are isolated cases of fraud where assets were being double booked as collateral for multiple debt  structures." 

Nevertheless, the credit issues have fanned investor unease over stretched valuations in global markets, leaving them alert to any signs of stress. Stocks have held up well, and the economy has remained resilient despite uncertainty surrounding some of President Donald Trump's policies, including tariffs. 

IDIOSYNCRATIC RISKS? 

Investors are now assessing whether recent strains in US credit markets could affect valuations across markets, after an overnight Wall Street selloff rippled through Asia and Europe and cast a spotlight on the AI-fueled stock rally that some fear may have inflated a bubble. 

JPMorgan Chase CEO Jamie Dimon said earlier this week about credit markets, "When you see one cockroach, there are probably more, and so everyone should be forewarned." 

An industry executive said that markets have taken note of Dimon's comment, pausing to wonder if sees signs of broader trouble that are not visible to other market participants. 

"Attention is turning to the underlying health of the economy, as emerging credit losses amongst America’s regional banks raised further questions about lending practices," said Derren Nathan, head of equity research, Hargreaves Lansdown. 

White House economic adviser Kevin Hassett said on Friday that banks have ample reserves and that he was optimistic that credit markets could stay ahead of the curve. 

He added in an interview with Fox Business Network that Trump administration officials led by Treasury Secretary Scott Bessent and Federal Reserve's Michelle Bowman are "cleaning things up right now" without providing further details. 

Meanwhile, another senior industry executive said that credit problems do not appear to be widespread, and recent concerns stem from a series of fraud cases. 

REGIONAL US BANKS REBOUND 

In early US trading, the SPDR S&P regional banking ETF was up 0.4 per cent, a day after the benchmark tumbled 6 per cent, its steepest one-day selloff in six months. 

Strong earnings from Truist Financial , Regions Financial, and Fifth Third bolstered investor sentiment, sending most US

regional banks higher. 

"The few recent corporate bankruptcies appear to be isolated cases, with the raft of bank earnings reports this week actually noting overall improving credit quality in the third quarter," said Stephen Biggar, director of financial research at Argus Research. 

Zions Bancorp, at the heart of the investor scrutiny, recovered 5 per cent, after closing down 13 per cent. Western Alliance was up 2.4 per cent after losing roughly 11 per cent on Thursday. Jefferies shares jumped 5 per cent following a steep drop in the previous session, with analysts calling investor concerns overdone. 

The US KBW Regional Banking Index closed down 6.3 per cent on Thursday. It was last up 1.3 per cent, while an index tracking large-cap rivals was flat. 

The latest selloff came after Zions said it would take a $50 million loss on two commercial and industrial loans from its California unit, while Western Alliance disclosed it had initiated a lawsuit alleging fraud by Cantor Group V, LLC. 

Attorneys for Cantor denied the allegations. 

Credit impairments in private debt have been rising and default rates have hit 5.5 per cent, said Mark Dowding, chief investment officer at RBC BlueBay Asset Management, citing the latest available data for the second quarter. 

Analysts say that any cracks in credit on Wall Street are likely to spill over into other areas of the financial sector. 

BROADER MARKET IMPACT 

European banks fell almost 3 per cent, with Deutsche Bank and Barclays sliding around 6 per cent, and Societe Generale down 4.6 per cent, after financial firms in Asia, especially Japanese banks and insurers sank. 

"What we see in the banks selling off overnight in the US, Asia wakes up to it, Europe wakes up to it, and so it spreads," said TD Securities head of global macro strategy James Rossiter. 

European bank shares have rallied strongly this year, with analysts pointing to the latest troubles as a chance for investors to book profits. Meanwhile, Gold hit a fresh record high. 

US banks borrowed nearly $15 billion from the Federal Reserve's Standing Repo Facility (SRF) on Wednesday and Thursday, the largest borrowing over a two-day period since the Covid-19 pandemic. 

On Friday morning, however, banks did not tap the repo facility, although they get another chance to do so in the afternoon. 

The SRF acts as a liquidity backstop for potential funding shortfalls. Introduced in July 2021 in response to the pandemic, the Fed's facility provides twice-daily overnight cash loans in exchange for eligible collateral such as US Treasuries. 

"The market is clearly priced for perfection," said Bo Pei, analyst at US Tiger Securities. "This leaves sentiment vulnerable, so even isolated negative headlines can trigger outsized reactions."