More bad news on loans crushes US banks

Regional banks are cratering on Thursday following more news of souring loans.

Zions Bancorp tanked after announcing that it’s taking a $50 million charge-off relating to loans of more than $60 million made to investment funds that purchased distressed commercial mortgage loans. It’s suing the borrowers, alleging that their collateral was not protected in accordance with the terms of their loans. Zions said it “believes this is an isolated situation, it plans to engage counsel to coordinate an independent review.”

Western Alliance Bancorp is also facing significant selling pressure, as it made a loan with an outstanding balance of nearly $100 million to the same investment funds, which it is also suing, alleging fraud. However, Western Alliance also reaffirmed its full-year guidance while disclosing this news.

More signs of credit stress are not what the doctor ordered for financials, which were already on edge in the wake of the high-profile busts at Tricolor and First Brands. The Financial Select Sector SPDR Fund and SPDR S&P Regional Banking ETF are poised for their biggest one-day drops since April.

Adding to the risk-off tone are indications of funding stress in interbank markets. The secured overnight financing rate (SOFR) has traded above the top end of the Federal Reserve’s target range for its policy rate amid anecdotal reports of elevated demand for short-term financing from regional banks. However, this also coincides with the timing of corporate tax payments and US Treasury settlements, which also act as drains on cash.