Big banks like JPMorgan Chase and Goldman Sachs faced concerns after regional bank Zions disclosed a $60 million loan wipeout due to borrower misrepresentations. Western Alliance sued the same borrower for fraud, triggering a selloff amid fears of another banking crisis similar to 2023.

Investors worry about the quality of loans to non-depository financial institutions (NDFIs) after alleged fraud cases involving NDFIs like Tricolor. JPMorgan reported a $170 million loss related to Tricolor, while a third case of fraud raised red flags among analysts.

The rise of NDFI lending by banks, totaling $1.14 trillion, has been a rapid trend since 2012. Banks fund non-bank lenders due to regulations post-2008 crisis. Some analysts believe the recent stock selloff was an overreaction, but concerns linger about the risks associated with NDFI loans.

Loan losses from NDFI lending can result in near-total wipeouts, causing uncertainty among investors. Regional banks, despite benefiting from an improving interest rate environment, face questions about their NDFI exposures. Analysts caution against companies with high NDFI loan levels, urging investors to seek undervalued options in the market.

Read more at CNBC: How a string of bad loans has bank investors hunting for hidden risks