Bank stocks are falling despite surging interest rates

By the Editorial Team · Friday, October 9, 2026

European bank stocks have fallen about 7 percent since early September despite rising interest rates, driven by concerns over higher borrowing costs, a flattening yield curve, and increased competition for deposits squeezing profit margins. Upcoming third-quarter earnings reports will be closely watched for signs of whether banks can maintain lending growth and pass rate increases through to savers, which could determine if their valuations rebound.

Bank stocks in Europe have declined sharply since early September despite a notable rise in interest rates, highlighting investor concerns over unusual pressures facing the sector. Typically, banks benefit from higher rates because the interest they charge on loans tends to increase faster than the rates paid to depositors, thus expanding profit margins. However, recent market movements suggest a more complex scenario.

The Stoxx index tracking major European banks has dropped around 7 percent since September, roughly double the decline of the broader market. One factor behind this weakness is the risk that borrowing costs have risen to levels that could suppress demand for loans. For example, the average interest rate on five-year fixed-rate mortgages in the UK recently topped 6 percent, potentially limiting growth in new lending.

Another complicating element is the nature of the interest rate increases. Short-term bond yields have risen more sharply than long-term ones, which is unfavorable for banks that traditionally fund themselves through short-term borrowing and lend over longer horizons. Rising short-term funding costs could erode the expanded profit spreads that banks have enjoyed amid the tightening cycle. Additionally, increased competition for deposits, fueled by fintech firms offering attractive savings rates, may force banks to raise the interest paid to depositors more than in the past, further squeezing margins.

Industry observers are awaiting third-quarter earnings reports, expected next week from U.S. banks and the following week from European lenders, where executives are likely to face questions about the extent to which rising central bank rates are being passed through to savers, a metric known as the "deposit beta."

Not all analysts are pessimistic. Research from Keefe, Bruyette & Woods indicates that deposit and loan rates in Europe have increased in tandem, mitigating margin pressure. Deutsche Bank’s Chief Financial Officer, Raja Akram, recently stated that rate hikes should ultimately boost bank income. Furthermore, some loan demand is being underpinned by enduring trends such as increased investment in defense and infrastructure projects, which may sustain lending growth even amid higher rates. In fact, loan growth to Eurozone companies exceeded 4 percent in both July and August, the best performance in three years.

The recent decline in bank shares has moderated market expectations, with the Stoxx banks sub-index now trading at a lower forward price-to-earnings ratio than at the beginning of the year. Should banks deliver more optimistic results, their valuations could appear particularly attractive. European banks have outperformed the general market over the past five years and remain positioned to extend that streak if underlying fundamentals hold.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.