Fraud and Bad Loans Spark Regional Bank Worries

Investors are reportedly seeking signs of stress within the regional banking sector.

That’s according to a report Tuesday (Oct. 21) from Reuters, which notes that these concerns came after a week in which some regional banks reported bad loan and fraud issues.

Analysts told the news organization that, in the wake of the 2023 banking crisis, investors have no appetite for uncertainty, and that even isolated loan or fraud troubles could lead to wider sell-offs as traders scramble to lower exposure.

“Years of easy credit and low transparency have left investors uncertain about where risks truly lie, even small negative surprises can spark outsized repricing,” Tim Hynes, global head of credit research at Debtwire, told Reuters.

The report notes that KBW Regional Banking Index has fallen 6.1% this month and 4.8% for the year, while the KBW Bank Index, which monitors large-cap banks, is up 13.5%.

According to Reuters, investor confidence had already been shaken by a pair of bankruptcies in the automotive sector: auto parts maker First Brands and subprime lender Tricolor. Fifth Third reported a $178 million loss last week related to the collapse of Tricolor, while JPMorgan Chase wrote off $170 million.

“Asset quality metrics across banks have been deteriorating but have held up better than we expected. Losses have been low, so these recent numerous larger loan problems have raised fears of a broader deterioration,” said Michael Driscoll, credit rating officer, Global Financial Institutions Ratings at Morningstar DBRS.

“But one of the lessons from 2023 regional bank failures was that banks’ funding can unravel faster than in the past if sizable issues emerge.”

The Reuters report points out that many bankers — Fifth Third CEO Tim Spence among them — have downplayed comparisons to the regional banking crisis of 2023. Investors, however, are concerned that problems cropping in quick succession suggest more broad-based credit quality issues, the report added.

“A wave of additional ‘cockroaches’ could reset risk tolerance across markets, pressuring valuations and tightening financial conditions further,” Hynes said.

Meanwhile, PYMNTS wrote earlier this week that Tricolor’s collapse highlights “the danger of fast-scaling credit portfolios built on complex data pipelines.”

“Expanding the number of data points and models also multiplies the potential for model drift, data gaps and weak controls,” that report added.

This lesson hits home for banks experimenting with artificial intelligence (AI)-driven underwriting, PYMNTS wrote.

“Efficiency and inclusion cannot outpace validation and governance,” and as covered here recently, “investment in AI must behave like capital expenditure: measurable returns, traceable risk and tight alignment to business outcomes.”