Loan fraud revelations at Zions and Western Alliance reignite fears of wider credit fallout

Two US regional lenders — Zions Bancorp and Western Alliance Bancorp — have disclosed losses tied to alleged loan fraud involving investment funds linked to Andrew Stupin and Gerald Marcil, reviving Wall Street’s concerns about a potential new wave of credit problems.

The banks reported tens of millions in losses, small compared to the multi-billion collapses of First Brands Group and Tricolor Holdings, yet enough to trigger a selloff across the financial sector. On Thursday, 74 major US banks collectively lost over $100 billion in market value, as investors reacted to what appeared to be another sign of stress in credit markets.

According to a lawsuit filed by Zions, its unit California Bank & Trust lent $60 million to funds managed by Stupin and Marcil to finance the purchase of distressed commercial mortgage loans. An internal probe later found that many of the notes and underlying properties had been transferred to other entities, leading the bank to record a $50 million charge-off. Western Alliance also confirmed exposure to the same borrowers and saw its shares plunge 11%, while Zions fell 13%, its steepest drop in six months.

Lawyers for Stupin and Marcil denied the allegations, calling them “unfounded” and saying their clients would be “fully vindicated” once all evidence is presented. Both Western Alliance and Zions declined to comment further.

The incidents follow the bankruptcies of Tricolor Holdings, a subprime auto lender, and First Brands Group, an auto-parts supplier owing more than $10 billion. Those collapses have raised questions about the health of the nonbank lending ecosystem and its ties to traditional lenders.

“This is an industry where investors tend to ‘sell first and ask questions later,’” analysts at JPMorgan Chase noted, adding that the sudden concentration of “credit one-offs” is fueling unease across markets.

Even before the latest disclosures, JPMorgan CEO Jamie Dimon had warned that more credit problems were likely ahead. “When you see one cockroach, there are probably more,” Dimon said earlier this week, after his bank reported a $170 million hit from Tricolor.

While large institutions like JPMorgan can absorb losses of that size, regional lenders remain more exposed, especially after the liquidity shocks they endured in 2022. Still, analysts pointed to one reassuring sign: most big banks have kept their provisions for bad loans low. JPMorgan set aside $3.4 billion in the third quarter, but its five closest peers collectively reserved the least in two years — with Morgan Stanley adding nothing at all, suggesting that for now, the industry sees the fallout as contained.