Shares of two US regional banks plummeted on Thursday after the companies revealed they had encountered fraud in issuing loans to funds investing in non-performing commercial mortgages, heightening concerns about further cracks in the credit market.

Zions Bancorp's stock fell by as much as 15% after the company disclosed a $50 million impairment charge on a loan underwritten by its wholly-owned subsidiary, Bank of California & Trust in San Diego.

Western Alliance Bancorp's stock dropped by as much as 13%, as the company also stated it had provided loans to the same borrower.

Affected by this news, the US KBW Bank Index closed down 3.6%, marking its largest decline in six months.

The disclosed incident exacerbates other recent loan crises, including subprime auto lender Tricolor Holdings, which filed for bankruptcy last month, rendering some debts nearly worthless. Subsequently, auto parts supplier First Brands Group also declared bankruptcy. JPMorgan Chase and Fifth Third Bank disclosed hundreds of millions in losses related to Tricolor.

While the largest US banks can easily absorb these shocks, the overall impact is more concerning for regional banks.

Wells Fargo analyst Mike Mayo stated in an interview: "If JPMorgan has issues with Tricolor loans, it’s not a big deal. But if smaller banks have problems with these loans, the impact will be much greater."