Concerns over bad loans rocked bank stocks on Thursday – how many ‘cockroaches’ are there?

Shares of regional banks fell Thursday after Zions Bancorp said it would write off fraudulent loans made to two borrowers, adding to investor concerns about lending standards and stresses in credit markets.

Zions Bancorp (ZION) said Thursday that it recently identified “what it believes to be clear misrepresentations and contractual defaults” by two borrowers. As a result, it plans to write off $50 million of the $60 million outstanding on the affected loans.

Zions shares fell 13% on Thursday, dragging down leading regional banks. The KBW Regional Banking Index fell 6%.

Recent bankruptcies have been red flags

The recent bankruptcies of two companies in the automotive sector – auto retailer Tricolor and auto parts maker First Brands – have highlighted potential risks in the credit market. Tricolor is alleged to have fraudulently underwritten risky mortgage loan portfolios to numerous creditors, while First Brands was allegedly borrowing against invoices to hide the true size of its debt.

Regional lender Fifth Third Bancorp (FTB), in a regulatory filing in early September, said it would take a $170 million charge related to the collapse of subprime auto lender Tricolor Bank. JPMorganChase (JPM) also wrote off $170 million of Tricolor-related loans in the third quarter. Raystone, which facilitates short-term business loans, said $2.3 billion had “simply disappeared” as a result of First Brands’ failure.

The double bankruptcy has some on Wall Street worried that more credit losses could occur in the near future. “I probably shouldn’t say this, but when you see one cockroach, there are probably more,” JPMorgan CEO Jamie Dimon said Tuesday following a better-than-expected earnings report from the banking giant.

“I expect it to be a little worse than what others expect,” Dimon added, noting that private credit underwriting standards “may not be as good as you think.”

The unique risks of lending to non-bank financial institutions

Zions’ filing Thursday added to growing concerns about transparency in the banking system, particularly with regard to lending by non-deposit financial institutions (NDFIs), sometimes referred to as non-bank financial institutions. NDFIs—a category that includes hedge funds, insurance companies, mortgage lenders and consumer loans—provide financial services but do not accept deposits and therefore do not qualify as a bank and are not regulated as such.

Bank lending to national financial institutions has witnessed tremendous growth in the past decade. Since the 2008-2009 financial crisis, bank loans to OFIs have grown at nearly three times the rate of the next fastest-growing loan category, according to the Federal Deposit Insurance Corporation’s 2025 risk review.

NDFI lending poses a unique risk to banks. “It may be particularly difficult for banks to evaluate credit decisions and manage loans originated by private credit companies,” according to the Federal Deposit Insurance Corporation (FDIC). Additionally, “loans originating outside the banking system are not subject to the same safety and soundness standards as bank loans, which can lead to high-risk lending across the financial system.”