The issue of fraud in the credit market

Background

Following the bankruptcy of two auto-related companies last month — auto parts supplier First Brands Group and auto loan provider Tricolor Holdings — two U.S. regional banks recently disclosed significant bad debts, reigniting market concerns over credit risks. Zions Bancorp and Western Alliance Bancorp announced last Thursday that they had been victims of credit fraud in connection with lending to poorly managed commercial real estate funds. The banks alleged that the same group of borrowers transferred mortgage notes without disclosure, provided falsified documents during the loan process, and pledged collateral with values far below audit requirements, leading Zions Bancorp to book a $50 million provision and Western Alliance Bancorp to file a lawsuit in August.

Commentary

The market reacted sharply to the news. On October 16, both banks’ shares plummeted — Zions Bancorp fell 13% and Western Alliance Bancorp dropped 11% — dragging the S&P Regional Banking Index down by 6.3%. The selloff also hit large banks, with Citigroup and Bank of America sliding 3.53% and 3.52%, respectively. The incident rekindled fears of a repeat of the Silicon Valley Bank collapse in 2023, pushing the VIX volatility index up to 25.31. JPMorgan CEO Jamie Dimon warned of a potential “cockroach effect” in credit markets, cautioning that overly loose lending standards in past years could trigger wider economic fallout as growth slows.

By Friday, however, as investors interpreted the fraud cases as isolated incidents stemming from an overheated credit environment rather than systemic failures, market anxiety eased. The bad-debt situation is still deemed manageable, insufficient to pose a systemic risk. U.S. equities rebounded broadly on Friday, led by AI-related stocks, with indices approaching record highs. The VIX subsequently retreated to around 17 this week.

We believe this credit fraud incident warrants continued monitoring. Although the market has digested much of the concern, it underscores signs of overheating in the credit market, particularly within private credit. Emerging after the global financial crisis, private credit filled the lending gap as traditional banks tightened loan standards while corporate financing needs persisted. As of the end of June 2025, the global private credit market had reached roughly $2 trillion. With AI development demanding massive capital investment, corporate funding needs are expected to keep rising. On October 22, Meta and Blue Owl Capital announced the largest private credit deal in history, forming a $27 billion joint venture to develop the Hyperion Data Center, signaling aggressive expansion into AI infrastructure.