NEW YORK (

TheStreet

) -- Following

more downgrades from Standard & Poor's

and a report of a coming $10 billion lawsuit by

American International Group

(BAC) - Get Report

over mortgage-based securities losses,

Bank of America

(BAC) - Get Report

led bank stocks down on Monday, with shares plunging over 20% to close at $6.53, following last week's 16% decline.

Shares of

Citigroup

(C) - Get Report

were down 16% to close at $28.16, following last week's 13% drubbing.

Investors hammered the banking sector in reaction to the

downgrade of Standard & Poor's long-term debt rating for the United States to AA+ from AAA

, even though federal bank regulators said immediately after S&P's announcement that

banks' capital requirements wouldn't be affected by the downgrade

.

S&P said in a statement early Monday that "the immediate effect" of its downgrade of U.S. treasury paper would "be neutral to banks," in light of the regulators' guidance on bank capital and because the

Federal Reserve

would "continue to accept Treasuries as collateral for overnight borrowings, with no capital penalty."

The ratings agency also said that "due to the downgrade, longer-term interest rates will likely start to rise gradually, as buyers of Treasury bonds demand higher rates to compensate for the added riskiness of U.S. Treasuries," but that with U.S. treasuries maintaining their status as the "preferred place for flight-to-safety movements...the net effect should be a slight increase in long-term rates. "

S&P said that it expected "bank net interest margins to increase slightly, going forward," with loan quality "unchanged by the downgrade."

Those comforting words had no effect on the market, as investors remained quite sour on the banking with the

KBW Bank Index

(I:BKX)

down 11% to close at 36.99, after last week's 10% decline.

The best performer among the 24 index components was

Commerce Bancshares

(CBSH) - Get Report

, which was down "only" 6% to close at $35.86.

Regions Financial

(RF) - Get Report

saw its shares drop 14% to close at 4.41, following last week's 16% decline. Regions stands out as the only large publicly traded bank holding company still owing federal bailout funds received through the Troubled Assets Relief Program, or TARP. The company owes the U.S. Treasury $3.5 billion.

Capital One

(COF) - Get Report

was down 12% to close at $37.63, as even a credit card lender with

strong profits

can't hold back investor onslaught when facing the prospect of a decline in consumer sentiment and spending. The shares declined 10% last week.

SunTrust

(STI) - Get Report

was down 14% to close at $18.53, following last week's 12% decline.

JPMorgan Chase

(JPM) - Get Report

were down 9% to close at $34.13, following a 7% pullback for the shares last week. KBW analyst David Konrad said that

JPMorgan was a good pick in the current environment

.

Shares of

Wells Fargo

(WFC) - Get Report

-- which Konrad also likes -- were down 9% to close at $23, after sliding over 9% last week.

Kevin Petrasic, a partner in the Paul Hastings Global Banking practice, told

TheStreet

that a consequence of S&P's downgrade "one consequence may very well be a more conservative banking sector posture that impacts lending," which could hurt "small business lending activities, which, of course, goes to the heart of job creation." Petrasic added that the U.S. could "see a vicious downward cycle if we fail to get our house in order by putting a credible deficit reduction plan in place."

The private mortgage insurers were quite volatile, with

PMI Group

( PMI) up 15% to close at 29 cents, after the stock tanked 75% last week on word that its main private mortgage subsidiary was undercapitalized.

MGIC

(MTG) - Get Report

was down 40% to $2.90, following last week's 20% drop, and

Radian

(RDN) - Get Report

was down 30% to $1.99, following a 13% decline last week.

American International Group -- which also has a major presence in the private mortgage insurance space -- was down 10% in afternoon trading to $22.61, following last week's 13% decline.

RELATED STORIES:

JPMorgan a Ratings Apocalypse Survivor: KBW >

S&P Continues Financial Ratings Massacre >

S&P Downgrades U.S. Debt Rating to AA+ >

U.S. Downgrade Doesn't Hit Bank Capital Requirements >

U.S. Downgrade Worries Increase for Big Banks >

A Chill Pill for Long Term Stock Investors >

Can Buffett Save Bank of America? >

Bank of America Downgraded by Mike Mayo >

Bank of America Still a 'Buy': Citigroup >

Berkshire Upgraded As 'Offensive' Play >

Debt Crisis Not Better, Just Different: Analysts >

--

Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here:

Philip van Doorn

.

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http://twitter.com/PhilipvanDoorn

.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.