Big Bank Stock Selloff Gaining Steam (Update 1)

Updated with midday share prices and additional details on Bank of America report in paragraph six.

NEW YORK ( TheStreet) -- Shares of big European and U.S. banks were lower in midday trading Tuesday as negative headlines continue to build around the financial sector.

European bank shares led the downward surge, with U.S.-listed ADRs of Barclays Capital ( BCS) and Banco Santander ( STD)down by more than 7% and Credit Suisse ( CS) and Deutsche Bank ( DB) shares lower by more than 6% midday.

The Financial Times highlighted a report from the International Institute of Finance, a group it noted represents "a substantial number of Athens' private sector government bond holders," which states that a Greek "disorderly" default and exit from the single currency could rise to one trillion Euros.

U.S. bank stocks, which had a strong start to the year but have moved sideways over the past month, were also lower, with Citigroup ( C) down 4.67% and Morgan Stanley ( MS) down 5% in midday trades while Bank of America ( BAC) and Wells Fargo ( WFC) were both down by more than 2.5%.

Citing the 34% rally in the KBW Bank Index "since its Oct' 11 trough, along with a wide range of buy- and sell-side expectations," Bank of America Merrill Lynch analyst Erika Penala expressed concerns that a much anticipated regulatory "stress test" of U.S. banks "is far less likely" to be "a positive catalyst for bank stocks - instead highlighting regulatory overhang and potentially muting or reversing the pace of the 2012 rally," according to the report.

Bank of America led the charge, but has lagged since that time, a report Monday from Stifel Nicolaus analyst Chris Mutascio pointed out. Mutascio further argues Bank of America earnings estimates are likely to keep dropping.

While Bank of America shares gained 46% from the start of the year through Feb. 8, versus a 15% rise for the KBW Bank Index, the bank's shares flat from that date to the end of last week, while the KBW index is up 0.8%.

Bank of America shares were also lower on Monday, dropping 15 cents to close at $7.97.

The bank selloff looks to be part of a broader pessimism throughout global markets judging from remarks by Gavin Friend, FX strategist at National Australia Bank, to Reuters.

"We're in risk-off mode at the moment and it's starting to gather momentum. Sentiment has turned towards China which has unnerved people generally," the strategist told the newswire in a story published Tuesday.

-- Written by Dan Freed in New York.

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