By Nupur Anand, Lananh Nguyen and Saeed Azhar

NEW YORK (Reuters) -Jitters around U.S. banks' exposure to loan losses have fueled expectations for more mergers and acquisitions as big buyers may be spurred to look to absorb smaller or weaker rivals, according to four senior industry sources.

More than two years after the sudden failure of Silicon Valley Bank that destabilized the industry, auto company collapses and bad loans have hurt bank stocks in recent weeks and sparked concerns that more pain is on the horizon. The U.S. KBW Regional Banking Index <.KRX> sank more than 6% on Thursday before recovering some ground on Friday. It has fallen almost 5% this year.

"Stock market activity and valuations have always driven M&A conversations, so it is possible that the current market movements could speed up those conversations," said Dan Hartman, a lawyer at Nutter, adding banks were already open to M&A because of the Trump administration's friendlier stance toward deals.

"The bigger the banks get, the better prepared they can be in a situation to absorb significant credit losses."

The latest scare came on Thursday when Zions Bancorporation disclosed losses tied to two commercial and industrial loans and Western Alliance said it had initiated a lawsuit alleging fraud by Cantor Group V, LLC, sending broader banking shares lower. It followed bankruptcies of First Brands and Tricolor in the auto industry, which sent ripples through credit markets in recent weeks and cast a spotlight on the exposure of some of the world's biggest banks.

Still, there are key differences between worries now and the 2023 regional crisis, a senior industry executive who declined to be identified said, adding that concerns about credit quality are exacerbated because information on banks' loan exposure is typically kept private. While securities mismatches that led to the 2023 bank failures were visible to shareholders, credit losses are aggregated and only disclosed to bank shareholders if they reach a certain material threshold.

The concerns over credit will make buyers more cautious as they pursue deals, according to the industry executive.

The industry executive and a second industry source said that any growing concerns about smaller banks could promote M&A activity. The executive did not mention any specific bank as a target but said bank boards grow worried when they see prolonged bouts of weakness, and are more likely to press management to consider a sale, the executive said.

Still, the higher risk of taking on banks which could have problems would give some buyers pause, two of the sources said.

Another industry source said bank executives have been discussing M&As as the regulatory landscape improves for deal-making, based on interactions with various banks. The source did not name specific banks.

A broader positive economic environment in recent months has also made it easier for institutions to decide it is time to sell, another industry source said.

POTENTIAL TARGETS

Banks including Zions, Flagstar First Horizon, East West, Popular, Western Alliance, and Webster Financial, could be potentially attractive deal targets, an investment banking source told Reuters earlier this month, based on that person's own internal analysis on banks in general, and not based on any information about specific deals. The banks did not immediately respond to requests for comment.

Bank deals have risen, with the 51 announced bank deals in the third quarter, the highest three-month total in four years, according to data provider S&P Global Intelligence.

Still, stock price volatility is generally considered bad for dealmaking, as it makes it harder to agree on a valuation. Early-stage M&A considerations may be paused until the broader market calms in coming days and weeks. The uncertainty, though, emphasizes the importance of scale in helping absorb market and credit shocks, supporting the longer-term prognosis for deals, according to an industry banker.

For smaller banks, credit trouble could prompt boards or shareholders to pressure them to sell to midsize lenders.

For the most part, bank loans have been performing better than expected, said Michael Driscoll, Credit Rating Officer, Global Financial Institutions Ratings at Morningstar DBRS.

"Losses have been low, so these recent numerous larger loan problems have raised fears of a broader deterioration," Driscoll said. "But one of the lessons from 2023 regional bank failures was that banks' funding can unravel faster than in the past if sizable issues emerge."

Greg Hertrich, the head of U.S. rates strategy at Nomura, said the latest selloff would revive strategic deal talks, instead of tempting any new buyers or sellers to emerge.

"If there are changes in the market's view of the enterprise value of these franchises, then that could accelerate timetables," he added.

(Reporting by Nupur Anand, Lananh Nguyen and Saeed Azhar in New York, additional reporting from Chris Prentice, David French and Manya Saini, editing by Megan Davies and Diane Craft)