U.S. bank stocks extended their second-half decline on Thursday as a sharp rise in interest rates and bond yields increased concerns about credit demand and capital-markets activity. Weakness across the financial sector comes alongside renewed inflation concerns and a challenging period for the U.S. government bond market.

Bank Index Falls More Than 13% From Its Peak

The KBW Nasdaq Bank Index, which tracks major U.S. banks, fell as much as 2.4% during the session before paring its losses and ultimately trading 0.7% lower. The index returned to levels last seen in late May and remains more than 13% below the peak reached in mid-August. Citigroup shares fell 1.9%, PNC declined 1.8% and Bank of America dropped 1.4%.

The pressure follows a particularly weak month for financial stocks compared with the broader market. According to Truist Securities, financial stocks posted their weakest monthly performance relative to the S&P 500 since 1990. The sharp increase in borrowing costs over the past month has raised concerns that households and businesses could reduce demand for loans, while higher rates could also weigh on capital-markets activity.

Higher Financing Costs Threaten Deal Activity

The rapid rise in interest rates could affect more than traditional lending activity. It may also pressure businesses that generate significant revenue for Wall Street banks. As financing becomes more expensive, companies may delay mergers and acquisitions, while activity across capital markets could weaken.

Recent data already point to a slowdown in dealmaking. Global M&A volume fell to about $1.23 trillion in the third quarter from a record $1.8 trillion in the second quarter. The postponement of Oura’s IPO, along with companies such as Holtec Nuclear and Bamboo Insurance putting their offerings on hold, also reflects growing caution across financial markets.

Banks Face Trading Weakness and Growing Technology Pressure

Additional pressure came from Jefferies Financial Group, whose latest results reinforced expectations that bond-trading activity at major Wall Street banks weakened during the third quarter. Several executives at large banks have already indicated similar trends, potentially affecting trading revenue at a time when changes in interest-rate volatility are reshaping market conditions.

At the same time, banks are facing another structural challenge from advances in AI technology. Wider adoption of AI tools, including autonomous agents, could increase pressure on profit margins if the technology leads to changes in operating costs and staffing requirements. Investors will continue monitoring bond yields, lending activity, M&A volumes and trading revenue, alongside the developing impact of AI on the banking business model.