What happened

A surprise rate cut by the Federal Reserve sent banks stocks sharply lower on Monday.

Banks of all sizes -- including titans JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and Citigroup (NYSE:C), as well as smaller banks such as Fifth Third Bancorp (NASDAQ:FITB), SVB Financial (NASDAQ:SIVB), Western Alliance Bancorporation (NYSE:WAL), and Axos Financial (NYSE:AX) -- fell as much as 22%. 

So what

COVID-19 -- the disease caused by the novel coronavirus -- threatens to drive the U.S. economy into a recession. The Federal Reserve, in a desperate attempt to mitigate the damage, slashed its benchmark federal funds rate by 100 basis points, to a target range of 0% to 0.25% on Sunday. Interest rates plunged in response.

The Fed's actions will likely lead to lower profits for many banks since they tend to earn lower profit margins on loans when interest rates decline. Many investors, aware of this likelihood, sold off their bank shares, which resulted in crushing losses for bank stocks on Monday.

A downwardly sloping line chart.

Bank stocks suffered brutal losses on Monday. Image source: Getty Images.

Now what

With interest rates likely to remain low for the foreseeable future, banks' margins could stay at depressed levels for quite some time. As such, their shares could remain under pressure until interest rates stabilize and begin to head higher once again.