By Alun John, Ankur Banerjee, Manya Saini and Nupur Anand NEW YORK/LONDON/SINGAPORE (Reuters) -U.S. bank stocks rebounded on Friday, clawing back some losses after fears over bad loans triggered a global selloff that swept through European and Asian markets earlier in the day. The weakness hit Wall Street, with main equities indexes seeing a mixed open before inching higher in choppy trading, as investors stayed on edge about banks. The concerns added to anxiety about escalating U.S.-China trade tensions and the global economic outlook. The U.S. KBW Regional Banking Index closed down 6.3% on Thursday. It was last up 1%, while an index tracking large-cap rivals was up marginally. Investors in bank stocks have grown jittery. After a string of credit scares and surprise writedowns since 2023, confidence has gotten another knock in recent weeks from auto bankruptcies and alleged fraud that triggered losses at some banks. "Markets have been gripped by a sense of fear and panic in the last couple of days," said Timothy Coffey, associate director of depository research at Janney Montgomery Scott. "There are different issues that are being conflated into one big issue about credit concerns." Pressure on bank stocks "is likely to continue, this panic is like a fever. Once it enters the system, it takes a while to leave." The credit issues have fanned investor unease over stretched valuations in global markets, leaving them alert to any signs of stress. Stocks have held up well, and the economy has remained resilient despite uncertainty surrounding some of President Donald Trump's policies, including tariffs. IDIOSYNCRATIC RISKS? Investors are assessing whether recent strains in U.S. credit markets could affect valuations across markets, after an overnight Wall Street selloff rippled through Asia and Europe and cast a spotlight on the AI-fueled stock rally that some fear may have inflated a bubble. JPMorgan Chase CEO Jamie Dimon said earlier this week about credit markets, "When you see one cockroach, there are probably more, and so everyone should be forewarned." Market participants have taken note of Dimon's comment, pausing to wonder if sees signs of broader trouble that are not visible to others, one industry executive said. "There is a nervousness now after the First Brands and Tricolor bankruptcies, then a third issue seems to confirm fears that there are a lot of subprime assets," said Brian Mulberry, senior client portfolio manager at Zacks Investment Management. "It appears that these are isolated cases of fraud where assets were being double booked as collateral for multiple debt structures." White House economic adviser Kevin Hassett said on Friday that banks have ample reserves and that he was optimistic that credit markets could stay ahead of the curve. He added in an interview with Fox Business Network that Trump administration officials led by Treasury Secretary Scott Bessent and Federal Reserve's Michelle Bowman are "cleaning things up right now," without providing further details. Meanwhile, another senior industry executive said that credit problems do not appear to be widespread, and recent concerns stem from a series of fraud cases. The banking sector's exposure to two recent U.S. auto bankruptcies has rekindled concerns about lending standards more than two years after Silicon Valley Bank's failure triggered broader turmoil. "In the post SVB world, regulators have been asking banks about their commercial real estate exposure, the percentage of their uninsured deposits, deposit strategy, how they are set up at the discount window and those conversations have not changed," said Dan Hartman, a lawyer at Nutter. REGIONAL U.S. BANKS REBOUND Strong earnings from Truist Financial, Regions Financial, and Fifth Third bolstered investor sentiment, sending most U.S. regional banks higher. "The few recent corporate bankruptcies appear to be isolated cases, with the raft of bank earnings reports this week actually noting overall improving credit quality in the third quarter," said Stephen Biggar, director of financial research at Argus Research. Zions Bancorp, at the heart of the investor scrutiny, recovered 4%, after closing down 13%. Western Alliance was up 1.5% after losing roughly 11% on Thursday. Jefferies shares jumped 5% following a steep drop in the previous session. The latest selloff came after Zions said it would take a $50 million loss on two commercial and industrial loans, while Western Alliance disclosed it had initiated a lawsuit alleging a borrower. BROADER MARKET IMPACT European banks fell almost 3%, with Deutsche Bank and Barclays sliding around 6%, and Societe Generale down 4.6%, after financial firms in Asia, especially Japanese banks and insurers sank. "What we see in the banks selling off overnight in the U.S., Asia wakes up to it, Europe wakes up to it, and so it spreads," said TD Securities head of global macro strategy James Rossiter. U.S. banks borrowed nearly $15 billion from the Federal Reserve's Standing Repo Facility (SRF) on Wednesday and Thursday, the largest borrowing over a two-day period since the Covid-19 pandemic. On Friday morning, however, banks did not tap the repo facility, although they get another chance to do so in the afternoon. The SRF acts as a liquidity backstop for potential funding shortfalls. Introduced in July 2021 in response to the pandemic, the Fed's facility provides twice-daily overnight cash loans in exchange for eligible collateral such as U.S. Treasuries. "The market is clearly priced for perfection," said Bo Pei, analyst at US Tiger Securities. "This leaves sentiment vulnerable, so even isolated negative headlines can trigger outsized reactions." (Reporting by Ankur Banerjee in Singapore and Alun John in London and Manya Saini in Bengaluru. Additional reporting by Gertrude Chavez-Dreyfuss, Kevin Buckland, Stella Qiu, Dhara Ranasinghe, Jose Joel, Pritam Biswas and Medha Singh. Editing by Mark Heinrich, Mark Potter, Lananh Nguyen and Nick Zieminski)
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