Fraud allegations loom, U.S. regional bank preferred stocks become the "eye of the storm"

U.S. regional banks' preferred shares are facing the most severe selling pressure since the collapse of Silicon Valley Bank, as investor confidence in the sector rapidly erodes due to the disclosure of fraud incidents.

Zions Bancorp and Western Alliance Bancorp disclosed on Thursday that they encountered loan fraud, leading to a 10% plunge in the stock prices of both banks. Zions' preferred shares plummeted 6.36% to $20.38, marking an 18-month low and the largest decline since May 2023; Western Alliance's preferred shares fell 2.87% to $20.83, recording the largest drop since April 2024, with buy quotes indicating further declines on Friday.

These disclosures come at a time when the market is already highly tense due to the bankruptcy of auto loan company Tricolor Holdings and the collapse of auto parts supplier First Brands Group. JP Morgan CEO Jamie Dimon recently warned of a "cockroach effect" in the credit sector, prompting traders to remain highly vigilant for bad news and adopt a strategy of selling first and asking questions later.

The memory of the sell-off triggered by the regional bank crisis in 2023 is still fresh, further exacerbating the current panic. This crisis began with the collapse of Silicon Valley Bank and quickly spread to other lending institutions.

Fraud Incidents Trigger Sector Divergence

Both banks stated that they encountered fraud while issuing loans to funds involved in distressed commercial mortgages, leading to a noticeable divergence in the preferred share market.

Data compiled by the media shows that the so-called six major currency center banks' preferred shares were almost unaffected on Thursday, with both $1,000 and $25 par value securities remaining stable. In contrast, preferred shares issued by smaller banks suffered a more severe blow, with the average decline of retail market preferred shares with a $25 par value dropping by about 0.7%.

Zions Bancorp's 4.819% perpetual preferred shares fell to $20.38, while Western Alliance's 4.25% equivalent securities dropped to $20.83.

Credit Quality Concerns Emerge

Suvi Platerink Kosonen, a senior financial analyst at ING Bank, pointed out in a report on Friday that these incidents are isolated cases but indeed raise alarms about potential credit quality, as a large amount of capital chasing assets may lead to insufficient attention to risk management.

Although the tens of millions of dollars in fraud losses disclosed by Zions and Western Alliance are far smaller than the collapses of First Brands and Tricolor, these incidents have reignited the debate on Wall Street about whether the era of loose monetary policy is facing a reckoning.

U.S. banks issue preferred shares to raise supplementary capital, similar to how foreign banks issue more complex additional Tier 1 capital bonds.

Shadows of the 2023 Silicon Valley Bank Crisis Resurface

The 2023 Silicon Valley Bank crisis stemmed from the Federal Reserve's interest rate hikes, which increased rates and put pressure on the bond portfolios of Silicon Valley Bank and other regional banks When depositors began to withdraw funds, Silicon Valley Bank was forced to sell assets at a huge loss, ultimately leading to its collapse. Its collapse spiraled out to other banks, with panicked investors indiscriminately selling shares of lending institutions.

The current market reaction shows that investors remain highly vigilant towards the regional banking sector, and any negative news could trigger a similar chain reaction.