Regional Banks Just Hit Panic Mode — First Brands Bankruptcy Sparks ‘Cockroach Effect’ Fears as KRE Crashes Below 200-Day

Regional banks were slammed Thursday as fears of hidden credit losses rippled through the financial system following the bankruptcy of First Brands Group, an auto-parts supplier whose collapse has revealed tangled ties between traditional lenders, private credit funds, and off-balance-sheet vehicles. The SPDR S&P Regional Banking ETF (KRE) plunged more than 6%, slicing below its 200-day moving average at $60 and now eyeing the 200-week level near $55, a breakdown that has traders flashing back to the 2023 regional bank crisis.

The shock came after Zion Bancorporation (ZION) and Western Alliance (WAL) disclosed loan losses linked to First Brands, joining Jefferies Financial Group (JEF), which recently acknowledged limited exposure to the same borrower. Zions said it would take a $60 million provision and $50 million charge-off tied to loans made through its California Bank & Trust unit, citing borrower “misrepresentations” and plans to pursue legal recovery. Western Alliance alleged fraud related to collateral loans and filed a lawsuit, though it reaffirmed full-year guidance. Both stocks fell more than 9%, dragging peers like Comerica (CMA), Fifth Third (FITB), Regions Financial (RF), and Truist (TFC) lower ahead of their earnings reports Friday.

The First Brands bankruptcy has become a Rorschach test for investor nerves — and a fresh reminder of the opaque plumbing connecting banks, private credit lenders, and middle-market borrowers. The company’s collapse revealed nearly $12 billion in borrowings, some reportedly backed by “phantom collateral” and off-balance-sheet entities that left creditors exposed to overlapping claims. The Department of Justice is investigating whether invoices and inventory were pledged multiple times, and billions of dollars have effectively vanished. The episode has drawn comparisons to Enron-era shell financing, with legendary short-seller Jim Chanos calling it proof that private credit’s “magical machine” of risk transformation was “running on illusion.”

For banks, the immediate question is whether First Brands’ fallout is isolated or symptomatic of a deeper issue — one tied to the under-regulated ring fence between regional lenders and private equity sponsors. That intersection, long considered a “gray zone” by regulators, has grown to represent hundreds of billions in exposure through warehouse lines, receivables facilities, and shared credit structures. “If folks start worrying about who lent to whom,” one analyst said, “this can turn pandemic fast.” The structure mirrors what fueled contagion fears in March 2023, when the collapse of Silicon Valley Bank and stress at First Horizon cascaded through smaller lenders via funding uncertainty and mark-to-market losses.

Even large institutions are on alert. JPMorgan CEO Jamie Dimon, addressing the First Brands situation earlier this week, warned, “When you see one cockroach, there are probably more.” The line has since become shorthand for investor anxiety about hidden leverage in the system. Dimon’s comment came as Jefferies (JEF) revealed roughly $45 million in expected losses tied to First Brands but emphasized that they are “readily absorbable and pose no threat” to its financial condition. Deutsche Bank analysts backed that view, saying the losses were immaterial and the selloff in Jefferies — now down more than 20% this month — “appears overdone.” Still, sentiment toward financials has turned fragile, with JEF, WAL, and ZION all hitting new multi-month lows intraday.

Morningstar’s DBRS unit noted that while fallout should remain contained, the episode exposes how much private credit’s growth has blurred traditional risk boundaries. Its analysts warned that “complicated bankruptcies of larger, privately held corporates” are likely to increase, citing parallels to the Tricolor Holdings subprime lender failure last month, which forced JPMorgan and Fifth Third to record combined write-downs of nearly $400 million. For insurers, Morningstar flagged potential “mark-to-market losses on CLOs and private credit investments” and possible trade-credit insurance claims from suppliers tied to First Brands.

Against that backdrop, traders are preparing for a volatile Friday as a wave of regionals — CMA, FITB, RF, TFC, and HBA — report earnings before the open. Any sign of rising provisions, liquidity stress, or commentary around private credit exposures could either deepen or calm the rout. Analysts expect management teams to emphasize stability and low exposure, but after Thursday’s bloodbath, confidence remains brittle. As JPMorgan’s Anthony Elian wrote, “Even if these exposures are isolated, this is an industry where investors tend to sell first and ask questions later.”

From a technical standpoint, the sector’s slide below its 200-day moving average signals a break in intermediate momentum. If KRE fails to reclaim the $60 level soon, technicians warn of a possible retest of the 200-week average near $55, a threshold that previously marked the bottom during the 2023 panic. With short interest climbing and ETF volume surging, sentiment indicators suggest hedge funds are aggressively hedging financial exposure ahead of Friday’s reports.

Still, many strategists see the pullback as a potential buying opportunity if the panic proves overdone. Deutsche Bank and several others argue that the First Brands-linked losses are limited and that Western Alliance and Jefferies’ disclosures indicate no systemic capital risk. “This isn’t 2023 all over again,” one strategist at Mizuho said, “but with the market priced for perfection, even minor credit scares get amplified.”

The broader concern, however, lies in what this episode reveals about shadow banking and credit opacity. The web of relationships among regional banks, private credit funds, and PE-backed borrowers has grown increasingly complex — and lightly supervised. If investors lose faith in the transparency of that ecosystem, it could restrict financing across the middle market, slowing investment and job growth.

In short, the First Brands bankruptcy is more than just another credit event — it’s a stress test for how resilient the post-SVB regional bank landscape really is. Whether it remains a footnote or becomes a contagion story may depend less on losses already disclosed, and more on whether the next “cockroach” surfaces before confidence can rebuild.