The nightmare that no one thought would happen again is back. This time not in “A Nightmare on Elm Street”, but in “A Nightmare on Bank Stocks”. Markets have temporarily plunged, US bank stocks have collapsed in a matter of hours and the VIX fear index on Wall Street has soared, reminiscent of the darkest days of 2008. A spark, a seemingly insignificant $60 million loan, was enough to ignite panic and reignite fears of a new Lehman Brothers-style crisis.
Investors are rushing to take cover, analysts are talking about “contagion” and a “credit blizzard”, while markets in Asia and Europe are collapsing like dominoes. Is the ghost of Lehman returning to haunt the global financial system again?
Negative signs…
In this context, the Wall Street barometer S&P 500 index opened with negative signs, after the heavy fall of markets in Asia and Europe, in reaction to the revelation that two small regional US banks had exposure to a potentially fraudulent loan worth $ 60 million. The “contagion” also extended to the Nasdaq 100 contracts, which fell by 1.4%.
The VIX fear index (which measures volatility) jumped by 32% on Friday, October 17. It had not been at such a high level since President Trump upset the market with the “Liberation Day Tariffs” in April.
Until Thursday afternoon, few outside Utah and Arizona had ever heard of Zions Bancorporation or Western Alliance Bank. The two banks revealed that they had exposure to $50–60 billion in bad loans that may be… fraud. What followed was extraordinary: 74 US bank stocks lost $100 billion in market value, as the S&P 500 fell 0.63%.
Investors have been spooked by the First Brands scandal: the auto parts supplier had borrowed more than $10 billion from the private credit market and then declared bankruptcy.
In Europe, both the Stoxx 600 and the FTSE 100 lost more than a percentage point immediately after trading opened.
The spillover to other risk assets not only shows that markets remain sensitive to issues at regional banks (a legacy of the SVB collapse in 2023), but also that the broader credit market, which has been operating with extremely tight spreads in recent months, may be affected.
Even the dollar is being hit, falling 0.08% and has lost 0.73% of its value against foreign currencies over the past five days, according to the DXY index.
Liquidations also spilled over into the high-yield bond market, as investors turned to the safe haven of US government securities. Other risk assets also came under pressure, with US high-yield spreads widening by +10 basis points. Treasury yields rose, with the 2-year yield falling -7.3 basis points to a three-year low of 3.42%. The mood among analysts is gloomy.
In credit markets for more than a year, there has been a grudging acceptance that there were – and are – a series of credit problems that could prove significant and dangerous for the overall economy.
Finally, banks unexpectedly borrowed money through the Federal Reserve’s “repo” facility for the second day in a row. They normally only do so at the end of the month or quarter, suggesting that cash reserves at some banks are tighter than expected.
Jefferies: “First Brands deceived us,” says CEO
Jefferies CEO Rich Handler told investors that the bank believes it was “swindled” by its exposure to bankrupt auto parts supplier First Brands Group.
Jefferies has been dealing with the fallout from its exposure to First Brands, through investment units such as Point Bonita Capital, as well as the damage to its reputation, having helped the company raise billions of dollars from other investors. Jefferies shares have fallen about 25% in the past month.
“I’ll just say we were scammed, okay,” Handler said in response to questions about First Brands during the bank’s investor day on Thursday. The troubles at First Brands and auto lender Tricolor, combined with recent revelations that Western Alliance and Zions Bank detected fraudulent borrowers, have raised concerns about lax lending standards.
One investor called Point Bonita’s exposure to First Brands a “failure of risk management.”
Jefferies President Brian Friedman said Point Bonita’s exposures were mostly to First Brands’ investment-grade clients. Point Bonita, a vehicle that invests in invoice-linked debt, disclosed that it had a $715 million exposure to First Brands.
The exposure on Jefferies’ balance sheet is much smaller, as the bank held a small portion of the fund’s equity base. Handler insisted that the collapse of First Brands did not cause significant damage to Jefferies’ core business.
Trust Economics: Asset quality concerns over Zions and Western Alliance
Volatility in U.S. regional bank stocks has returned as investors are raising concerns about potential asset quality issues, following recent announcements by Zions Bancorporation and Western Alliance Bancorporation, Trust Economics said.
Trust Economics estimates that while asset quality metrics have deteriorated, they have remained better than expected. Recent large loan defaults have raised fears of a broader deterioration.
However:
Regional banks are generally well-positioned to absorb higher loan losses, despite pressures from inflation, tariff uncertainty and geopolitical risks, especially in leveraged lending.
Most regional banks are expected to remain able to absorb higher loan loss provisions through their earnings without impacting their capital.
Both Zions and Western Alliance had lower non-performing loan (NCO) charges than their peers, due to the largely collateralized nature of their loan portfolios. Zions is expected to remain profitable, even with a $60 million loss provision. Its net income in the first half of 2025 was $412.0 million.
Western Alliance said it does not expect a loss from its relationship with Cantor. Its net income in the first half of 2025 was $423.1 million, while it reaffirmed its forecast for non-performing loan (NCO) charges at a manageable level of about 0.20% for the year.
What did the futures show?
Meanwhile, S&P 500 futures (SPX futures) are trading “well below” the trend channel, having broken the 50-day moving average at the time of writing.
It is worth noting that there has been no close below this level since the uptrend began in May. A “normal” close below the 6,600 area would mean that there is no real support until 6,400, while the 200-day moving average is much lower.
NASDAQ – Head-and-Shoulder Pattern Possible?
The NASDAQ is flirting with the lower bounds of the trend channel, while the 50-day moving average is around current levels. A slightly lower close could signal a breakout to the downside from the head-and-shoulders (HS) pattern.
The 23,500 area (in futures) is the important support level to watch, with the 100-day moving average around the same point.
The Russell Correction
So far, it’s just a failed breakout and a corrective move, but the last two candles are worth noting, which are quite negative. Russell futures have retreated to the lows of the trend channel, with the 5-day moving average slightly lower, while the 100-day is around the 2,300 area.
Contagion of pressure?
The gap between KRE (regional banks index) and S&P 500 (SPX) remains very wide. It will be interesting to see if the pressure on regional banks starts to take on a broader, “global” character.
Intense Pressure on Volatility Markets
As we have noted this week, there is strong “underground” tension in volatility markets. The VIX index continues to soar since the early hours of trading, reaching levels not seen since late April. At the time, the S&P 500 was trading around 5,500 points.
Remember the SVB crisis?
During the Silicon Valley Bank (SVB) crisis, the S&P 500 fell about 7%, with the VIX rising, but the volatility response was much more muted. Today, the VIX seems to be measuring something much broader than just the pressure on regional banks.
