U.S. bank stocks fall on Fitch downgrade warning, tougher oversight worries

(Reuters) -Shares of U.S. banks dropped on Tuesday and a key banking index hit its lowest in a month, after a Fitch Ratings analyst told CNBC that the agency could downgrade several lenders.

The warning followed rival Moody’s downgrading 10 mid-sized lenders earlier this month, citing funding risks and weaker profitability.

The sector was also squeezed after the Federal Deposit Insurance Corp chief on Monday signaled a proposal to overhaul how regional banks prepare living wills, fanning fears of more tighter regulation.

Banks are already feeling the weight of tougher oversight proposals as the industry’s top cops rush to plug gaps in the aftermath of the crisis earlier this year.

Bank of America and Wells Fargo were down more than 2% each. JPMorgan Chase, Goldman Sachs Group, Citigroup and Morgan Stanley declined between 1.6% and 1.8%.

Among the mid-sized lenders, Western Alliance Bancorp and PacWest Bancorp fell 8.4% and 1.6%, respectively. On Monday, Michael Burry’s Scion Asset Management disclosed it had liquidated its stake in both the banks.

Comerica and KeyCorp were also among the losers, dropping nearly 4.5% each.

The S&P 500 banks index was down 2.1%, hitting its lowest in a month.

Separately, Discover Financial Services shares fell 8.3% to $94.10, a day after its CEO stepped down.

The company had paused stock buybacks last month and disclosed a regulatory review over some incorrectly classified credit card accounts from around mid-2007.

(Reporting by Niket Nishant in Bengaluru; Editing by Arun Koyyur and Sriraj Kalluvila)