A selloff in regional banks roiled trading desks around the world, with traders increasing their bets on Federal Reserve interest-rate cuts due to brewing fear about the next financial shoe to drop.

Another unsettling round of financial industry trading halts hit Western Alliance Bancorp and PacWest Bancorp, this time with losses exceeding 60% for each stock. The rout engulfed several other lenders, both large and small, with First Horizon losing more than 30% after its merger with Toronto-Dominion Bank was canceled. An investigation into Goldman Sachs' role in Silicon Valley Bank's deal weighed on sentiment as well.

All 21 stocks in the KBW Bank Index, which includes financial heavyweights such as JPMorgan and Bank of America, fell. The $2.5 billion SPDR S&P Regional Banking ETF was on track for its lowest level since October 2020. The bank rout kept the broader market under control, with the S&P 500 briefly paring losses amid gains in some big tech names, but still heading for its fourth straight decline.

The Cboe Volatility Index (VIX), Wall Street's fear gauge, surged, reaching the critical 20 level. This is in stark contrast to the calm that prevailed in markets for the most part in April, when the index fell below 16 only last week.

This also demonstrates how investor confidence remains fragile following a string of bank failures, despite Fed Chair Powell's assurance on Wednesday that authorities were getting closer to containing the crisis. Smaller lenders are under pressure after a year of rate hikes slashed the value of their bond holdings, resulting in an estimated $1.84 trillion in unrealized losses.