Two regional banks in the United States have revealed loan fraud cases that have triggered panic in the market, resulting in a wave of sell-offs targeting regional banks on Wall Street. Investors are adopting a "sell first, ask questions later" strategy amid concerns about credit risk. Zions Bancorp and Western Alliance Bancorp disclosed on Thursday that they suffered losses due to fraud involving troubled commercial mortgage investment funds. Although the scale of their losses is relatively small compared to recent credit blowups, involving merely tens of millions of dollars, the market's reaction has been significantly severe. As a result of this news, the S&P Regional Banks Select Industry Index plummeted by 6.3% on Thursday, marking its worst single-day performance in months. Zions' stock price fell by 13%, while Western Alliance dropped by 11%. The panic quickly spread, dragging down the entire banking sector, with the total market capitalization of 74 major US banks erasing over $100 billion in just one day.

This chain reaction highlights the market's fragile nerves, with investors fearing this is just the tip of the iceberg. Jamie Dimon's recent "cockroach" warning—"When you see one cockroach, there are probably more"—is still fresh in mind. Analysts at JPMorgan point out that banking is a sector where investors tend to "sell first, ask questions later," and the rapid deterioration in market sentiment has become a greater concern than the banks' balance sheets themselves. Trigger: Two banks report loan fraud The immediate reason behind the market turmoil is two related loan fraud allegations. According to disclosures from Zions and Western Alliance, they provided loans to investment funds associated with individuals such as Andrew Stupin and Gerald Marcil for acquiring troubled commercial mortgages. Zions reported that its wholly-owned subsidiary, California Bank & Trust, granted a $60 million loan to a borrower and subsequently set aside $50 million for bad debt provisions. A lawsuit document from the bank indicated that an investigation found many notes and related mortgaged properties were transferred to other entities. Western Alliance also reported issuing loans to the same group of borrowers. In response, Brandon Tran, a lawyer representing Andrew Stupin and Gerald Marcil, stated in an email that the allegations against his clients are "baseless" and distort the facts. He added, "We believe that once all the evidence is presented, our clients will be completely exonerated." Market Panic: "Sell First, Ask Questions Later" Becomes Consensus Despite the relatively small losses disclosed by the two banks, the market has been rattled by a series of recent credit blowups. Last month, subprime auto lender Tricolor Holdings filed for bankruptcy, followed closely by the automotive parts supplier First Brands Group, which owed over $10 billion to Wall Street, declaring insolvency. Against the backdrop of these negative developments, the fraud allegations against Zions and Western Alliance became the last straw. Investor anxiety was instantly ignited, even as the S&P 500 index lingered near historical highs. Mike Mayo, managing director at Wells Fargo, stated: "When the credit market is thriving, there’s little room for mistakes—the good times are when bad debts proliferate. Hence, I believe that today’s cautious sentiment has overcome optimism." This "sell first, ask questions later" mentality quickly spread. Analysts Anthony Elian and Michael Pietrini at JPMorgan noted in a report that they are questioning why all these credit "outliers" seem to occur in such a short time frame. The sell-off on Thursday did not spare large bank stocks, with shares of Citigroup and Bank of America both declining by over 3%. Several large banks reported being affected by the recent high-profile bankruptcies, with JPMorgan and Fifth Third Bancorp disclosing total losses related to Tricolor reaching several hundred million dollars. Additionally, Jefferies Financial Group disclosed its exposure to First Brands, while JPMorgan reported a $170 million loss due to Tricolor. History Repeating? Shadows of the 2023 Banking Crisis The market's reaction has been driven largely by painful memories of the 2023 banking crisis, which began with the collapse of Silicon Valley Bank (SVB) and once engulfed the entire US banking sector. Matt Maley, chief market strategist at Miller Tabak & Co LLC, commented: "The bank run that occurred two and a half years ago in regional banks is still fresh in investors' minds. Therefore, after the news about Zions and Western Alliance this week, credit quality will be their top concern regarding this group." The roots of the 2023 crisis lay in the Federal Reserve's interest rate hikes, which pressured banks' bond portfolios, leading to depositor runs that forced banks to sell assets at a loss, ultimately triggering bankruptcies and a chain reaction. However, some analysts believe it's too early to declare a definitive repetition of history. Steve Sosnick, chief strategist at Charles Schwab, pointed out, "It’s too soon to assert that this is another SVB moment. However, given the severity of that disaster, it is entirely understandable for bank stock investors to remain vigilant about any situation that bears a similar resemblance." The differences in risk resilience between large banks and regional banks have also become increasingly pronounced. Mayo stated: "The largest banks have strong diversification capabilities to absorb such issues, while smaller banks have less room for error." In the coming weeks, as regional banks gradually release their earnings reports, investors will conduct a "deep-dive" examination of their credit quality and provisioning data; any surprises could once again trigger severe market volatility.