Moody's: U.S. regional bank distress 'not a systemic risk' — concerns remain

Bank stocks rebound despite fears of a 'second SVB incident'

Moody's, UBS: "Not a systemic risk"…market eased

Western Alliance maintains earnings guidance despite loan fraud controversy

Private credit and commercial real estate emerge as potential flashpoints

Shares of small- and medium-sized U.S. banks, which had at one point plunged amid fears that credit troubles could spread into a second Silicon Valley Bank (SVB)-style crisis, have recovered as opinions that the situation is not a systemic risk have emerged. The claim is that these are problems of individual banks and will not spread across the entire financial system. However, some warn that the private credit market and commercial real estate, where weaknesses have been revealed this time, could strike the financial sector again at any time.

Bank stocks rebound despite bad loans

Bank stocks that recently plunged due to credit troubles — Jefferies, Zions Bancorporation, Western Alliance — all rose together on the 17th (local time). Jefferies and Zions Bancorporation rose nearly 6% that day, and Western Alliance rose more than 3%.

The rebound in these bank stocks occurred after some analysts argued that this episode would not spread into a broader financial crisis.

Mark Zandi, chief economist at Moody's, said that day, "There are no signs that systemic problems are appearing among regional banks," and added, "Credit quality is generally sound, but there are some weak spots," attempting to calm the situation.

UBS's strategy team also said, "The U.S. stock and financial markets rest on a solid macroeconomic backdrop, and the current fear of credit risk is somewhat exaggerated," attempting to curb excessive concern.

The rise in bank stocks that day was also aided by a general sense of relief in the market. U.S. President Donald Trump repeatedly stated that he would proceed with a summit meeting with Chinese President Xi Jinping as scheduled.

Ross Mayfield, investment strategist at Baird, said, "This afternoon (the 17th) the positive mood is substantially related to the president's remarks about China," and added, "The president seems to understand that tariff threats are not sustainable and the administration does not want to undergo another sell-off like 'Liberation Day.'"

Investors were also reassured by reports that Western Alliance had filed with the U.S. Securities and Exchange Commission (SEC) to maintain its existing earnings guidance.

Risks remain

However, because the root causes of these banks' credit problems have not been resolved, there is continued concern that similar incidents could resurface at any time.

Mike Mayo, Wells Fargo's senior bank analyst, warned that as allegations of regional bank failures and fraud spread, risk management and credit screening within banks have weakened. He also pointed out, "The current distress is the result of a lax lending culture accumulated during the credit expansion period." He noted that, in the process of overcoming the COVID-19 pandemic, the U.S. central bank (Fed) injected large amounts of liquidity into the market and that the ultra-low interest rate policy led to relaxed credit screening by banks.

Jamie Dimon, CEO of JPMorgan Chase, recently said, "The credit cycle has been loose for too long, and now weak links are starting to appear," which is the same context.

The lax regulation of the private credit market is also analyzed as a potential trigger for a financial crisis. Non-bank financial institutions that operate private credit do not take deposits from the general public like banks; instead, they raise funds from a small number of professional investors such as pension funds or sovereign wealth funds. All loans are private, non-public contracts, making it difficult for regulators to accurately grasp the total size of distressed assets or where risks are concentrated. Also, because there are no market prices, fund managers value assets using internal models, making it easier for distress to remain hidden. In particular, concerns have grown that private credit distress could spread across banks as banks increasingly provide private credit to companies through subsidiaries, as Jefferies has done.

Peter Curry, senior analyst at Pave Finance, warned, "Non-bank private credit is overly opaque," adding, "Even if problems are not obvious, the market can react."

New York = Correspondent Shin-Young Park nyusos@hankyung.com