Understanding Recent Bank Fraud Headlines and Private Credit Risks
We want to provide some clarity on two topics currently making headlines: reports of fraud at certain regional banks and growing discussion around private credit risk.
Idiosyncratic vs. Systemic Risk
- Idiosyncratic Risk refers to company-specific issues such as isolated fraud or operational missteps that can be diversified away in a broad portfolio. Impact is limited to the affected firm or sector.
- Systemic Risk involves broad shocks affecting the entire financial system such as global crises, interest rate spikes, or recessions that cannot be diversified away.
Regional Bank Fraud Reports
Recent fraud cases at a few regional banks appear idiosyncratic, not systemic.
- Examples include Zions Bancorp’s $50M write-off and Western Alliance’s lawsuit regarding isolated borrower misrepresentations.
- Analysts and executives confirm these are not signs of widespread credit deterioration.
Why the outsized market reaction?
- Despite small dollar amounts, fear triggered sharp selling: regional bank stocks lost ~$100B in value in one day; the KRE ETF fell ~8.5% over two days before partially rebounding.
- This reflects the “cockroach effect”, the perception that one problem signals more to come, amplified by concerns over high rates and commercial real estate exposure.
- Large banks were less affected, thanks to lower CRE exposure.
Bottom line: The fraud cases are isolated, but fragile confidence caused systemic-like volatility. Also, it is worth noting, we do not have direct exposure to any of these regional banks.
Private Credit Market Concerns
The private credit market has grown by $1.2 trillion since 2008, offering attractive yields but introducing:
- Opacity: Loans are privately negotiated and not publicly traded.
- Valuation lag: Internal models can delay recognition of losses.
- Liquidity risk: Harder to exit positions quickly.
If economic conditions worsen, defaults could rise, turning isolated stress into broader market pressure.
Example: Ares Private Credit
- Diversified across 800+ positions with strong covenants.
- Historically low defaults and high recoveries.
- Illiquid but well-diversified idiosyncratic risk; systemic shocks remain the key concern.
Key Takeaways for Investors
- Short-term write-downs are normal in stress periods and often recover.
- Income distributions remain well above market averages.
- If your portfolio has 1–3 years of expenses covered by cash and liquid bonds, there’s no need to sell private credit during volatility.
- Staying invested and maintaining a long-term view helps capture recovery and income.
Our approach to invest in well diversified high-quality assets in a manner aligned with long-term goals and objectives helps protect our clients from common short-term market swings. As always, we are here to help you navigate these and any other developments. Please do not hesitate to let us know if you have any questions.
Sincerely,
Your Acumen Team
The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. The information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involve risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results. Diversification does not protect against loss of principal.
Acumen Wealth Advisors®, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors®, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Acumen Wealth Advisors®, LLC unless a client service agreement is in place.