Bank Stocks Fell 1.6% the Day the Fed Hiked. Higher Rates Aren't the Gift to Banks People Assume.
- On September 16, 2026, the Fed raised rates to 3.75%-4.00%. The Financial Select Sector SPDR (XLF) fell 1.6%. The S&P 500 fell 0.5%.
- Eight of the S&P 500's 11 sectors closed lower. Energy (XLE) fell 3%.
- JPMorgan CEO Jamie Dimon: "It's not clear to me we've slayed inflation."
- The 10-year Treasury yield is near 5%. Many banks still hold older, low-yielding bonds whose market value falls as yields rise.
- FactSet: 91% of Financials companies mentioned "AI" on their Q2 earnings calls, second only to Information Technology.
The day the textbook didn't work
Ask most people which stocks benefit from a rate hike and they'll say banks. Banks lend at higher rates when rates rise, so profits should go up.
On September 16, the Fed raised rates for the first time since 2023. The Financial Select Sector SPDR (XLF) fell 1.6%, more than three times the S&P 500's 0.5% decline. Only energy did worse, down 3% as oil fell on reports of more Saudi crude shipments.
This week, JPMorgan CEO Jamie Dimon said: "It's not clear to me we've slayed inflation."
Four reasons higher rates cut both ways
1. Deposits get expensive. Banks earn a spread: loan yields minus deposit costs. When savings accounts pay almost nothing, a hike widens that spread. After several years of higher rates, depositors are rate-aware. Money moves quickly to money market funds and high-yield accounts, so banks have to pay up to keep it. Analysts call the share of a rate increase passed on to depositors the "deposit beta." After the 2022-23 hiking cycle taught savers to shop for yield, it tends to rise faster than it used to.
2. Old bonds lose value. Banks hold large portfolios of Treasuries and mortgage bonds, many bought when yields were far lower. When the 10-year yield rises toward 5%, those bonds lose market value. Accounting rules often keep those losses off the income statement, but investors see them. They're also what brought down Silicon Valley Bank in 2023.
3. Credit losses follow tighter money. Higher rates squeeze borrowers on credit cards, commercial real estate and floating-rate business loans. Rising loan losses usually arrive 6 to 18 months after tightening. Bank stocks tend to price them in early.
4. A hawkish Fed means slower growth. Loan demand, dealmaking and trading all depend on the economy. A central bank signalling more hikes, with the Fed's median projection at 4.1% by year-end, tells investors growth may cool.
What actually helps banks
Banks do best with a steep yield curve: long-term rates well above short-term rates, a healthy economy, and deposit costs that lag behind. They borrow short, via deposits, and lend long, via mortgages and business loans.
That's why the relationship between the 2-year and 10-year Treasury yields matters more to banks than any single Fed decision. When long yields rise because of growth optimism, banks usually gain. When they rise because of inflation fear or heavy government borrowing, the benefit is much weaker.
How to look at bank stocks now
- Check net interest margin trends in the latest quarterly reports. Is it widening or shrinking?
- Look at unrealized losses on securities, reported in the notes to the financial statements. They show how exposed the bank is to rising long yields.
- Watch credit provisions. A rising allowance for loan losses is an early warning.
- Compare deposit growth to loan growth. Banks losing deposits must pay more to fund loans.
Our guide to reading bank earnings walks through each of these.
For Canadian investors
Canadian bank earnings depend mostly on the Bank of Canada, which is still at 2.25%. But Canadian banks own large US businesses, and US yields feed into Canadian bond yields and credit spreads. Because the big banks make up a large share of the TSX, a weak day for financials shows up in most Canadian index funds. See Canadian banks and TSX concentration.
The honest uncertainty
One day of trading proves nothing about the next year. Banks can do very well in a higher-rate world if the economy holds up and credit stays clean. The lesson is narrower: "rates up, banks up" is a rule of thumb, not a law. Check the balance sheet before you buy the story.
Frequently asked questions
Do banks make more money when interest rates rise?
Often, but not automatically. Banks earn the spread between what they charge on loans and what they pay on deposits. When rates rise, loan yields go up, but deposit costs also rise as customers move cash to higher-paying accounts. Rising yields also reduce the market value of bonds banks already own, and higher borrowing costs can increase loan defaults.
Why did bank stocks fall after the September 2026 Fed hike?
Investors weighed the costs of higher rates more than the benefits. The Fed signalled more tightening was possible, the 10-year Treasury yield was near 5%, and a tighter economy raises the risk of loan losses. Financials fell 1.6% on September 16 while the S&P 500 fell 0.5%.
What is net interest margin?
Net interest margin, or NIM, is a bank's interest income minus its interest expense, divided by its earning assets. It's the core measure of how profitable a bank's lending business is. Rising rates help NIM only if loan yields reprice faster than deposit costs.
Are Canadian bank stocks affected by the Fed hike?
Indirectly. Canadian banks earn most of their interest income from Bank of Canada-linked rates, which are still at 2.25%. But several have large US operations, and US yields influence Canadian bond yields, credit markets and bank valuations. Big Canadian banks are also a large part of the TSX, so their moves hit Canadian index funds.
Primary sources
Data & disclaimer: This article is for educational purposes only and is not financial or investment advice. Figures reflect data available as of Sep 18, 2026, and conditions change — always confirm current pricing, rates and rules with the provider before you act. Written by Elizabeta Dimoska. See our editorial standards and disclosure.
Comments