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Following a temporary lull, the regional bank storm has returned. On Oct. 16, the SPDR S&P Regional Banking ETF (NYSE:KRE) tumbled 6.2%, its biggest one-day decline since early 2023.
Meanwhile, new credit worries rolled over U.S. banks. Zions Bancorporation (NASDAQ:ZION) stock dropped 13%, while Western Alliance Bancorporation (NYSE:WAL) declined about 10%. Both firms reported losses related to soured business loans.
KRE ETF is under duress as regional banks suffer from credit stress and more. Track its live prices.
The selloff in KRE highlights how vulnerable investors are to the U.S. government shutdown now reaching its third week.
Critical economic data remains unavailable, clouding the economic outlook.
Volatility is evident:
These declines are part of a larger sell-off in U.S. smaller lenders. Investors are repricing exposure to possible credit losses and fraud cases. And while major national banks are relatively sheltered, regional bank ETFs are highly sensitive to such shocks.
Zions had a $50 million charge-off on two loans extended by its California Bank & Trust subsidiary, and Western Alliance had a fraud lawsuit related to a revolving credit facility. The announcements spooked investors nervous after the collapse of Silicon Valley Bank two years earlier, when fear of tight liquidity created a selloff among regional banks.
This time, the fault line has moved. Rather than deposit flight, credit deterioration is becoming the new source of stress. The bankruptcy of auto parts maker First Brands revealed the extent to which smaller lenders are exposed to questionable borrowers. Jefferies Financial Group also got caught in the crossfire, as court filings show its asset management business has $715 million of receivables tied to First Brands’ customers.
Market observers caution that the industry’s vulnerability to niche commercial lending can fuel systemic nervousness once more if losses expand. As CNBC’s Jim Cramer said, “Nothing encourages the Fed to act quicker than credit losses, as they’re a telltale indicator that the economy is heading in the wrong direction.”
Whether smaller lenders can weather a cooling economy and accelerating credit losses without triggering another confidence crisis is the next big question for the markets—and for investors still holding the sector through ETFs such as KRE.
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