Worries over rates and AI agents weigh on bank stocks
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Banks don't usually get a lot of public sympathy, but pour one out for them, or at least for those who have been bullish on bank shares.
The big picture: Even as consumers continue to spend and companies continue to borrow — all good for banks' business — their stocks have slumped in recent weeks, dragging the KBW Nasdaq Bank Index into correction territory.
Zoom out: The reasons are twofold. The main one is growing expectation that the Federal Reserve will raise the short-term interest rates it controls as much as twice more this year.
- That shift in rate hike expectations has helped flatten the Treasury yield curve, or the spread between the yield on the two-year Treasury and the 10-year Treasury.
- Last week, that spread narrowed to its tightest gap since March 2025.
How it works: Banks typically pay lower rates to borrow short-term funds, and use that money to make longer-term loans for which they charge higher rates.
- The difference between the costs of cheaper short-term borrowing and lending long-term at higher rates is a key driver of bank profits.
Yes, but: Treasury rates help determine the rates banks pay to borrow and charge to lend.
- So, when the yield curve flattens, it crimps their profitability.
Bank stocks were also hit last week by the apparent ease with which Meta's popular new AI agent, Muse, can help customers save money by canceling subscriptions or finding better deals, as Axios' Matt Phillips has noted.
- That's potentially significant for banks, as customer inertia and the headache of switching bank accounts have long allowed them to offer very skimpy interest rates on deposits, essentially lowering the bank's borrowing costs.
- At least one survey has found that Americans hold on to their checking accounts for an average of 19 years.
- This weekend, Torsten Slok, Apollo's chief economist, noted that many fintechs offer higher rates on deposits than banks, saying that "if every household used AI agents to optimize the return on their cash balances, banks could lose a large share of the cheap deposits they rely on to make loans, which would be a problem for the entire financial system."
By the numbers: The KBW Bank Index, comprising 24 big banks, regional banks and savings banks, reached a 52-week high of $195.55 on Aug. 17.
- It has since fallen 10.2% (a "correction" is a decline of 10% or more), to $175.57 on Friday.
