Was it the panic over bad loans that sent bank stocks down?

Regional bank stocks rose on Friday, rebounding from yesterday’s sell-off, as investors weighed the fallout from recent bankruptcies and fraud allegations that raised concerns about lending standards.

The KBW Regional Banking Index rose 1.7% today after falling 6% on Thursday, when lenders Zions Bancorp (ZION) and Western Alliance (WAL) revealed they had filed a lawsuit against borrowers accused of fraud, exacerbating investor anxiety about the health of bank loan portfolios. Zions shares rose nearly 6% today, rebounding from yesterday’s 13% drop, while Western Alliance shares added 3%.

Concerns about its lending practices first surfaced early last month when Tricolor Mortgage Bank declared bankruptcy amid allegations of fraud. The bankruptcy of auto parts maker First Brands, also accused of misrepresenting its finances, later in the month has heightened concerns about hidden risks on lenders’ books. These bankruptcies affected large and small lenders, including JPMorgan Chase (JPM) and regional lender Fifth Third Bancorp (FITB), both of which had $170 million in charges related to Tricolor.

“We think stocks are overreacting today, looking at exposure as a percentage [tangible common equity] “It’s low,” Jefferies analysts wrote in a note Thursday. Zions said yesterday that its total exposure was $60 million, about 1% of its available capital, according to Jefferies. Western Alliance said it believes existing guarantees will cover its $100 million in affected loans.

Jefferies analysts do not believe the recent turmoil is the canary in the coal mine as some suspect. “Although increased scrutiny around credit quality is top of mind, our base case positions these issues as ad hoc rather than systemic,” the analysts wrote.

On the other hand, Jamie Dimon, CEO of JP Morgan, warned that there could be more turmoil in the future. “Maybe I shouldn’t say this, but when you see one cockroach, there’s probably more,” Damon said Tuesday.

Executives ‘feel good’ about exposure to non-banks

Comments by bank executives in this week’s quarterly earnings reports also helped allay some concerns.

“We feel good about our exposures to non-deposit financial institutions,” said John Turner, CEO of Regions Financial (RF), referring to the type of financial company whose dealings with banks have come under scrutiny amid a wave of bankruptcies. Turner said much of Regions’ NDFI exposure is in its portfolio of REITs, which “[is] Very low leverage and really good performance.”

“We haven’t been hit with the major credit hits that you’ve seen in the last few days,” Webster Financial (WBS) CEO John Ciulla said Friday morning. “We are very confident that the underwriting we have is very strong and we are not in any kind of other esoteric risk categories,” he added, referring to the non-bank lending the company offers.

The Fed says the banking system can withstand shocks

Lending to NBFIs – ​​companies, sometimes called NBFIs, that provide financial services such as lending and investment management but do not accept deposits and are therefore not regulated as banks – has grown significantly over the past decade, especially at America’s largest lenders.

National development finance loans from large banks increased by 56% between 2019 and 2024, more than double the growth rate of total loans during that period, according to the Federal Reserve. At the end of 2024, national development finance institutions owed major banks about $2.3 trillion.

This year, the Fed included in its annual bank stress test an assessment of the risks posed by National Development Finance Fund (NDF) lending. The central bank estimated that loan losses at the largest banks would reach $490 billion over two years if credit quality across their NDFI portfolios deteriorated.

While this is a significant loss, the Fed concluded that “large banks are generally well positioned to withstand significant additional credit and liquidity pressures on key categories of lending exposures from non-bank financial institutions.”