Recently, two U.S. regional banks, Zions Bank and West Alliance Bank, faced significant turmoil due to credit fraud linked to the same company. Previously, natural gas company New Fortress Energy defaulted on bonds, Tricolor, a subprime loan company, filed for bankruptcy unexpectedly, and First Brands Group, an auto parts company, went bankrupt. As the credit storm escalates, financial markets are increasingly nervous, affecting not only smaller banks but also giants like JPMorgan Chase.

On October 16, the KBW Regional Bank Index, which tracks 50 regional banks, plummeted over 4%, marking its lowest level since August. Zions Bank's stock fell by as much as 13% intraday, while West Alliance Bank dropped nearly 8%. At the same time, shares of major banks also generally declined. The VIX index, regarded as the 'Wall Street fear gauge,' surged over 22% on the 16th to close at 25.31. By Friday, the VIX settled back at 20.78, indicating a slight easing in risk aversion.

The credit alarm for U.S. regional banks has sounded again. Is this a problem only for individual banks or indicative of a broader industry issue?

Both banks hit by credit issues linked to the same firm? The litigation against Zions Bank stems from two real estate mortgage loan transactions made in 2016 and 2017, worth a total of $60 million, issued to two affiliated special purpose investment companies, Cantor Group II and Cantor Group IV. According to various reports, Zions Bank’s subsidiary, California Bank & Trust, has sued Andrew Stupin, Gerald Marcil, and their partners, alleging that the fund managers abused the bank's trust by manipulating the loan structures and unilaterally removing the loan collateral protection clauses for personal gain.

In simple terms, Zions Bank's California branch issued two mortgage loans to the two real estate investment funds, but the fund managers breached the bank's trust by altering and stripping collateral terms and selling the collateral without authorization, effectively turning secured loans into unsecured ones. On October 15, Zions Bank Group revealed in regulatory filings that it had identified 「significant misrepresentations and defaults」 concerning these related commercial loans, resulting in a $60 million loss provision. The bank also discovered 「other violations related to the loans and collateral」 and has initiated litigation in California against the borrowing parties involved.

Currently, Zions Bank has completely lost control over the collateral, potentially converting the loans into non-performing loans or bad debts, while the fund managers have pocketed the proceeds from the property sales, harming the bank's interests. Zions Bank learned of this issue through West Alliance Bank's complaint and subsequently sought legal recourse to recover its losses. West Alliance Bank disclosed on the 16th that it has filed a fraud lawsuit over certain borrower's failure to provide collateral.

Analyzing recent quarterly financial reports, Zions Bank has maintained stability across its operations. The bank's asset size remains steady at over $87 billion, with a modest growth in loans and leases around $60 billion, constituting about 70% of total assets. Zions Bank is a typical traditional commercial bank, with its securities investment stable at $19 billion, and potential losses may diminish with the anticipated Federal Reserve interest rate cuts.

Over recent quarters, U.S. banks have seen rising operating costs, which is a risk signal worth noting. For Q2 2025, Zions Bank reported a net income of $244 million, positioning it to absorb the $60 million loan loss. However, prior to the recent wave of bank failures, many financial statements appeared strong, concealing several underlying issues. Given the rapid dissemination of financial information, a sudden collapse of a bank within days is not surprising.

As of October 17, the S&P Regional Bank Index has fallen 2.16% for the year, while the S&P 500 has increased by 13.3%. Over three years, the S&P Regional Bank Index decreased by 2.14%, while the S&P 500 gained 21.91%. Within five years, the regional bank index declined by 8.50%, compared to a 13.85% rise in the S&P 500. Regional bank stocks have significantly lagged behind broader market trends.

Regional banks are grassroots institutions that serve as the backbone of community finance in the U.S., catering to families, small businesses, and local governments by providing project financing and ensuring access to essential banking services. These banks understand the local economies and build strong relationships with their clients to meet their needs effectively. It is no exaggeration to say that regional banks are crucial engines of financial activity in grassroots communities.

Data shows that the market value of U.S. regional banks is approximately $971.19 billion (slightly higher than JPMorgan Chase's $810 billion). There are 331 regional banking institutions employing 786,731 people. Although there are many regional banks, their sizes vary significantly. For example, U.S. Bancorp’s market cap stands at $71.1 billion, PNC Financial Services Group at $70.65 billion, and Truist Bank at $54.93 billion. Other banks, like M&T Bank, Fifth Third Bank, Huntington Bancshares, First Citizens BancShares, Citizens Bank, Regions Financial, and KeyCorp, have market values below $30 billion.

Potential risks in the U.S. banking industry remain considerable. While the overall performance of the U.S. banking industry appears stable, a closer look reveals substantial risk vulnerabilities. Zions Bank has a market value of only $7.9 billion, categorizing it as a small to medium-sized bank, and many such banks exist. As of the end of Q2 2025, there were 4,421 banks and credit unions insured by the FDIC and 2,802 regulated banking institutions. These smaller banks often have concentrated operations (in real estate mortgages); a serious downturn in the real estate market could lead to their failure first. If risk factors in the U.S. banking sector are not addressed in a timely manner, a banking crisis could reoccur. However, the problems faced by banks also reflect significant issues currently plaguing the U.S. economy.

First, the floating losses on securities investments by banks (FDIC member banks or credit unions) remain significant, posing the greatest risk for industry instability. In Q2 2025, floating losses approached $400 billion, down from $689.9 billion in Q3 2022, yet still considerably high. If the Federal Reserve does not accelerate interest rate cuts to raise bond price levels, the U.S. banking sector will endure substantial capital management strain.

Second, rising inflation pressures in the U.S., along with increasing debt repayment burdens on households, businesses, and the federal government, coupled with a weak labor market, may lead banks to face operational challenges from rising non-performing loans. Additionally, the misuse of tariff policies during the Trump administration has intensified price pressures. According to research from S&P Global, tariff costs could exceed $1.2 trillion, with 55% of the costs passed on to consumers this year, increasing to around 70% next year. Tight household budgets may escalate loan default rates, leading to higher credit losses for banks, which represents the most concerning scenario.

Furthermore, the total federal debt in the U.S. has reached $37.92 trillion. Foreign investors, especially central banks, are increasingly reluctant to accumulate U.S. Treasury bonds, resulting in higher issuance costs for long-term bonds. Consequently, mortgage loan interest rates linked to long-term bond yields will remain elevated, prolonging financial burdens for households and businesses.

Finally, what is the state of the U.S. economy? Will the labor market continue to experience weakness? Ultimately, the challenges in the banking sector reflect the real conditions of the economy. U.S. economic growth signals are severely distorted by changes in net export trade, and tariff policies exacerbate the confusion. A significant reduction in U.S. imports could artificially inflate economic growth rates, while an increase would reduce them, as imports are deducted from GDP growth calculations.

Currently, the U.S. federal government is in a shutdown, leaving many government employees idled at home. No one is gathering or compiling economic operation reports, leading the market to operate in the 「dark」 based on intuition. In the absence of crucial government data, investors find it difficult to ascertain the true state of economic operations and whether anomalies exist in the credit market.

This Friday (October 24), the U.S. Department of Labor will release the Consumer Price Index, which could signal whether inflation pressures are rising. Current tariffs are at their highest levels since the Great Depression, and their economic impacts will inevitably become apparent. Economic uncertainty is higher than before, with financial markets likely to adopt a wait-and-see approach this week.