The stock market was down big on Monday. As of 3:10 p.m. EDT, the Dow Jones Industrial Average was down 2.6% and was on pace for its worst day of the year, and the S&P 500 was doing even worse, down by 3.4%. Worse yet, the tech-heavy Nasdaq declined by nearly 5% and was set to post its worst decline since September 2022.

Bank stocks were doing even worse than these major benchmarks. And it wasn't just big banks: Across the financial-services industry, stocks were taking a big hit. To name a few examples, megabank Citigroup (C -4.33%) was down by about 6%; investment banking giant Morgan Stanley (MS -6.37%) was lower by 8%; and online banking disruptor SoFi (SOFI -11.20%) plunged by about 12%.

Why are bank stocks getting hit so hard?

To be sure, while today's moves look scary, they are just the latest in a prolonged sell-off that has taken place over the past couple of weeks. Citigroup and Goldman Sachs have both fallen by about 22% since their mid-February 2025 highs. SoFi has declined by about 38% since reporting earnings in late January.

The short explanation is that recession fears and other economic headwinds are causing investors to lose confidence in bank stocks.

Between the numerous government personnel reductions, uncertain tariff policies, and recent weaker-than-expected economic data, the probability of a U.S. recession has increased sharply.

In fact, the Federal Reserve Bank of Atlanta now forecasts that GDP will contract by an annualized rate of 2.4% in the first quarter, which would be the worst economic growth since the COVID-19 pandemic nearly shut down the U.S. economy in the second quarter of 2020. Most economists define a recession as two consecutive quarters of negative GDP growth, so it looks more likely than it was a few months ago.

Banks and recessions

Recessions are generally bad for banks for a few different reasons. Most obviously, they can cause consumer demand for loans to drop. But they can also cause loan default rates to spike higher, especially when it comes to personal loans and credit cards, both unsecured forms of debt, which are focus areas of SoFi and Citi, respectively.

To be sure, there are some potential positive effects, such as lower interest rates that usually come with poor economic conditions. This can help lower banks' deposit costs and boost some types of lending activity (mortgage refinancing, for example). But let's be perfectly clear: In a recession, the bad would almost certainly outweigh the good for the banking industry.

On the investment banking side, while trading revenue tends to do well in turbulent market environments, poor economic conditions also tend to lead to less merger and acquisition (M&A) activity, fewer initial public offerings (IPOs), and less appetite from companies for new debt.

The bottom line is that banking is one of the most cyclical businesses, and that's why recession fears can make these stocks especially volatile. If the fears turn out to be overblown, this could be a buying opportunity. But if a full-blown recession hits, it would be fair to expect more volatility ahead.