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Shares in US regional banks fell on Thursday after two lenders disclosed that they were exposed to alleged fraud by borrowers, raising broader concerns about the health of bank loan portfolios.

The disclosures by Western Alliance Bank and Zions Bank follow the recent failures by car parts maker First Brands and auto lender Tricolor, which have left credit investors nursing losses and are under scrutiny from the US Department of Justice.

The KBW regional banking index, which comprises 50 smaller banks, fell more than 5.8 per cent on Thursday, on course for its lowest closing level since June. Shares in Zions had dropped 12 per cent and Western Alliance was down by more than 10 per cent. The two are members of the KBW bank index, which comprises 24 of the country’s leading lenders and was 3.3 per cent lower.

“When credit risk is rising, you just sell off the entire group and you get answers to your questions later,” said Timur Braziler, mid-cap bank analyst at Wells Fargo.

The drop in regional bank stocks helped prompt a move in the wider US stock market, with financials dragging the S&P 500 0.9 per cent lower.

In response to these regional bank worries — as well as the escalation in trade tensions between China and the US — the two-year Treasury yield sank to its lowest level since September 2022. The two-year yield, which moves with interest rate expectations, fell by as much as 0.09 percentage points to a low of 3.41 per cent. 

“There was no single obvious catalysing incident [for the two-year move]. There are a variety of different factors that are interrelated that prompted it,” said Jonathan Hill, head of US inflation market strategy at Barclays.

“Part of it has to do with some weakness in regional banks, part of it has to do with trade tensions between the US and China, and part of it has to do with worries about stress in the funding market,” he said.

Utah-based Zions Bank — which has about $89bn in assets — on Wednesday said in regulatory filings that it would take a $60mn provision after it had “identified what it believes to be apparent misrepresentations and contractual default” on “two related commercial and industrial loans” affiliated with two borrowers.

The bank also said it had found “other irregularities with respect to the loans and collateral” and that it had commenced a lawsuit in California against the borrowers.

Separately, Western Alliance disclosed in regulatory filings on Thursday that it had initiated a lawsuit alleging fraud by a borrower “in failing to provide collateral loans in first position, among other claims”. 

It is seeking to recover approximately $100mn, according to analysts at Citi.

The bank said on Thursday that it had “evaluated the existing collateral” and believed it covered the obligation. It also said it had “a limited guarantee and full guarantee from two ultra-high net worth individuals under certain circumstances, such as fraud”.

Western Alliance, which has about $87bn in assets, said that its “total criticised assets” — loans that show early signs of weakness — were “lower than they were on June 30, 2025” and affirmed its existing guidance and outlook for the year.

Analysts at Jefferies said the stock market reaction was “overdone” given the exposures of Western Alliance and Zions Bank represented 1.6 per cent and 1.1 per cent of their tangible common equity, respectively.

Shares in Banc of California fell by 8 per cent. The lender, with total assets of $34bn, has minimal exposure to the borrowers in question, according to a review of court documents by Jefferies analysts. They estimate that it will not incur any losses on this due to its senior position in the credit facility.

“The whole industry is being painted by the same brush,” said Catherine Mealor, head of small and mid-cap bank research coverage at KBW. “We are going to have pockets of credit stress as we move into this normalisation period. And so how does that impact the overall multiple that we put on the group?”

While Wall Street banks’ third-quarter results have shown resilient credit quality overall, the collapses of First Brands and Tricolor have raised concerns about lending standards.

“Historically fraud has been very idiosyncratic, very one off,” Braziler said. “And what if we are getting into an environment where more of these nefarious characters bubbled up to the top and fraud becomes a larger part of the conversation? I think that’s really the question at heart here and what investors are trying to figure out.”

Shares in Jefferies, which has exposure to First Brands, were down by more than 9 per cent on Thursday.

Western Alliance declined to comment beyond their filing. Zions did not immediately respond to a request for comment.