The stock market experienced one of its worst plunges in recent history on Wednesday, wiping out Tuesday's rebound and then some. As of 3 p.m. EDT, the Dow Jones Industrial Average and S&P 500 index were lower by 6.3% and 5.6%, respectively.
Bank stocks were no exception to the sell-off. Big banks were down across the board -- just to name a few, Wells Fargo (WFC -0.61%) was lower by 8.6%, Bank of America (BAC -0.78%) had lost 5.5% of its share price, and Citigroup (C -0.59%) was the biggest loser of the three, down by nearly 10%.
Bank stocks have been one of the hardest-hit parts of the stock market in the recent correction, but the big declines made more sense in the previous days and weeks. Specifically, banks make their money from the ability to charge interest to customers. Interest rates plunged to record lows over the past few weeks, so it made sense to think bank profits could take a hit.
That isn't the case Wednesday. In fact, Treasury yields are actually significantly higher for the day, up by more than six basis points to 0.81% on the benchmark 10-year Treasury.
Today's action seems to be fueled not by interest rate worries, but by fears of a deeper economic slowdown. Banks' ability to charge interest is just part of the equation -- they also need consumers who want to borrow money (and who can pay it back). In a recession, demand for loans slows down, there are fewer qualified buyers, and if unemployment rises, it can lead to an uptick in loan defaults.
At this point, it remains to be seen whether this is a short-lived correction or the start of a drawn-out bear market, but it appears that investors have legitimate worries about these banks' bottom lines, at least from a near-term perspective.