US banking stocks fall up to 25% in 3 months, is a bigger crisis brewing?
Big US banks have fallen between 11% and 25% in 3 months despite rising profits.
A crisis in the banking system may be brewing, and the cracks are showing in American banking stocks. History shows bank stocks often peak prior to recessions, so if this slump persists, the US economy would face significant challenges. The KBW Nasdaq Bank Index has fallen over 10% in the last 3 months. The benchmark Dow Jones US Banks Index is up by 10% in the last 12 months. But it is fast losing ground.
It is down by over 7% in the last 3 months and has slipped 3% in the last 30 days. So, what is spooking investors? Profits are up, so why are bank shares falling? The selloff comes even as the biggest banks post rising profits. Five of the largest US banking groups, JPMorgan, Goldman Sachs, Citigroup, Morgan Stanley and Wells Fargo, reported combined third-quarter profits of over $36 billion. That is up by around 13% compared with the same period in 2025.
The results have not lifted the shares. According to Reuters, third-quarter earnings are expected to rise up to 20% from last year for the largest banks. Investment banking and trading revenue is significantly higher than in the previous period. There are no signs of deterioration in the credit portfolio. So, if the numbers look healthy, why are investors selling? Capital One, Goldman Sachs, Morgan Stanley, Wells Fargo, Citigroup and JPMorgan have all crashed between 11% and 25% in the last 3 months.
Bank of America, the second biggest constituent of the Dow Jones U.S. Banks Index, is down nearly 10% in 1 month and 18% in the last 3 months. This selloff is not just an American story The banking crisis doesn't seem to be restricted to US banks. It looks like a global phenomenon. Banking stocks across the U.S., Europe, and Asia have fallen 15% to 30% from their recent highs. This is despite major stock indexes like the S&P 500 and Nasdaq still trading near record levels.
The situation in Europe is no different. Societe Generale, BNP Paribas, Barclays and Deutsche Bank have fallen between 18% and 27%. On October 7, Europe's main banking index dropped 3.5% in a single day, according to Reuters. Soaring bond yields are likely the reason behind the banking stocks sell-off. Globally, bond yields are soaring as investors dump bonds. That leads to a fall in bond prices. This puts pressure on the value of their bond holdings.
The US 10-year Treasury yield hit 5.35% on October 7, its highest since 2002. Banks park large sums in government bonds. When yields rise, older, lower-paying bonds lose resale value. That is the pain point. Higher interest rates can support banks' lending revenues. But they can also drive up their own funding costs and dampen demand for loans. Investors are focused on rising bond yields and their effect on banks' balance sheets.
They are closely examining quarterly bank earnings for signs that higher Treasury yields might affect their lending activities and increase the cost of funds. At Morgan Stanley, revenues from FICC fell 7% in the quarter from a year earlier. At JPMorgan, the drop was 4% and at Bank of America, 17%. Goldman Sachs had flat revenues with FICC trading. Citi was the odd one out, increasing its revenue 4% from a year earlier, reported Reuters.
Why are debt worries making things worse? On top of rising bond yields, government fiscal positions of most developed nations are flashing warnings. Government borrowing costs are raising concerns about a potential debt crisis resurgence. US debt has crossed $40 trillion, and the interest cost on that debt is over $1 trillion. This situation is being seen across countries globally. What if the selloff keeps going?
If the banking selloff persists and credit conditions worsen, it could impact business lending, consumer spending, corporate earnings, and the overall stock market. Currently, banks in multiple major economies are in correction territory. The broader market remains oblivious to the risks. Will it stay that way? Citizens Financial Group (CFG) CEO Bruce Van Saun told Yahoo Finance that worries about the current level of borrowing costs have been "overdramatized."
"I think those concerns are a bit overdone," Van Saun said, arguing that current interest rates "really haven't been enough" to stress the bank's borrowers or interrupt its deal flow, although "there's still a lot of uncertainty" about how much further rates could climb. Disclaimer: This article is for informational purposes only and does not constitute investment advice. Readers should consult a qualified financial advisor before making any investment decisions.
