Regional banks are damaging sentiment on Wall Street. Concerns about the sector's stability

Friday's session on global stock markets is marked by intense pressure from growing concerns about the stability of the banking sector. Following Thursday's sell-off in regional US bank shares, including Zions Bancorporation and Western Alliance, the market continues to analyze the implications of disclosed mortgage losses and fraud involving new investors..

Regional banks in the US are facing challenges stemming from the unique composition of their loan portfolios and the growing operational and credit risks in a rising interest rate environment. Significant losses have been revealed in recent weeks, with Zions recording a $50 million charge for bad loans granted to funds investing in high-risk commercial mortgages. Western Alliance is facing similar challenges; both banks have initiated legal proceedings related to allegations of fraud and improper collateralization of their loans.

The origins of these problems lie not only in specific fraud cases but also in the broader macroeconomic environment in which regional banks operate. Increased interest rates increase debt servicing costs for customers, which increases the percentage of loan defaults. Additionally, banks are increasingly engaging in credit relationships with entities outside the banking sector and in more complex financing mechanisms, which increases the risk of opaque collateral and difficulties in enforcing obligations.The wave of unrest has been exacerbated by the recent bankruptcies of major lenders (Tricolor Holdings, First Brands Group) in the automotive sector, where losses have spilled over into bank portfolios.

Increased demand for safe assets

The declines in the financial sector have rapidly spread to the US stock markets, as well as Asia and Europe. Major indices in Hong Kong, Japan, and Australia have all recorded significant declines, with European stock markets following suit. Furthermore, investors are awaiting the release of inflation data in the eurozone, which could provide clues about future ECB decisions, fueling uncertainty regarding monetary policy and the region's economic health.

At the same time, political events, especially international leaders' conversations, influence sentiment and the valuation of safe-haven assets. President Donald Trump and Russian President Vladimir Putin held another hours-long telephone conversation this year, during which Budapest was proposed as the venue for the next summit.Putin emphasized the strategic advantage of Russian troops and warned the US about the consequences of potential Tomahawk missile deliveries to Ukraine. This diplomatic dynamic, amidst market uncertainty, is resulting in increased demand for safe-haven assets – the Swiss franc and gold are setting new price records, and the euro is gaining against the dollar, signaling a shift in expectations regarding interest rates and local monetary policy trends.

Source: Mateusz Czyżkowski, XTB