It’s been a tough few weeks for Barclays (LSE:BARC) and other global banking shares. This FTSE 100 stock’s slumped 19% in value over the month, reflecting the unfortunate developments in the Middle East.

The thing is, Barclays’ share price is still 23% higher than it was 12 months ago. And so it still commands what is a sky-high valuation by normal standards. Could this cause the bank to continue toppling? I think so.

Pros and cons

With oil prices surging, expectations of soaring interest rates to control inflation are steadily increasing. There’s currently talk that the Bank of England may hike UK interest rates as many as four times in 2026. Only time will tell if this is an accurate foretelling.

Higher interest rates are on the one hand good for Barclays. It allows the bank to charge more interest on products like mortgages and credit cards, while typically increasing the rates it pays on savings more slowly. This difference in net interest margins (NIMs) is a huge boost to retail banks’ bottom lines.

However, in the broader scheme of things higher interest rates are a big negative for the banks. And especially in places like the UK, where a cost-of-living crisis is already raging. In this landscape, income growth could slump or even reverse as consumers cut back and businesses feel the pinch. It’s also possible the number of bad loans on banks’ books will surge.

Red lights flashing

But isn’t all this reflected in Barclays’ recent share slump? Not necessarily, as economists continue to grapple with the potential consequences of the Middle East conflict. What’s clear is the direction of news flow is extremely worrying for the banks.

Today (26 March) was the turn of the OECD to set the red lights flashing again. It suggested the UK will be one of the worst-affected countries, and slashed its growth forecasts to 0.7% for 2026. The body had tipped expansion of 1.2% as recently as December.

This is troubling for Barclays, as it sources around half of profits from these shores. In better news, the OECD raised its 2026 growth forecast for the US to 2% from 1.7%.

This is another key market for the bank. But for me, the prospect of worsening conditions in Britain — along with growing pressure in its investment bank as financial markets share — far outweigh the good news here.

The longer the Middle East conflict endures, the worse the outlook will become. And the problem is there seems to be no clear route to de-escalation for the US, Israel, or Iran.

Bottom line

As I mentioned above, the FTSE 100 bank still carries a hefty valuation today. Its price-to-book (P/B) ratio — which measures the share price against the bank’s asset values — is currently 0.8, which is double normal levels.

This in my opinion provides even more scope for a share price crash. In the current climate, I think investors should consider avoiding Barclays shares.