Traders ‘Spooked’ as Bank Lending Risk Puts Stock Market on Edge

The start of earnings season is exposing a potential crack in the stock market’s frothy foundation: risky lending by some regional banks.

Shares of Zions Bancorp and Western Alliance Bancorp plunged Thursday after the companies said they were victims of fraud on loans to funds that invest in distressed commercial mortgages. The disclosures sent the KBW Bank Index to its worst day since April’s tariff tantrum.

They followed a warning from JPMorgan Chase & Co. CEO Jamie Dimon about “cockroaches” in the credit market during the bank’s earnings conference call on Tuesday. He was referring to the implosions ...