Banks feel sting of Fed fight against inflation

The banking sector is in retreat, as it has been all week, as the effects of the Federal Reserve's fight against inflation begins to weigh heavily on a small number of banks that cater to the tech sector.

Late Thursday, SVB Financial Group, the parent of Silicon Valley Bank, lost 60% of its value after announcing plans to raise up to $1.75 billion in order to strengthen its capital position amid concerns about higher interest rates and the economy. Major financial institutions like Bank of America, Citigroup and JPMorgan were not immune, falling between 4% and 6%.

That sell-off continues before the opening bell Friday. Silicon Valley plunged sharply and was extraordinarily volatile before trading was halted. The banking sector is leading all others in declines.

Driving anxiety in the sector is the fight by the U.S. Federal Reserve against inflation.

As the Fed raises its benchmark interest rate, the value of bonds, typically a stable asset, are starting to fall. That is not typically a problem as the declines lead to “unrealized losses,” or losses that are not counted against them when calculating the capital cushion than banks can use should there be a downturn in the future.

However, when depositors grow anxious and begin withdrawing their money, banks sometimes have to sell those bonds before they mature to cover the exodus of deposits.

“We envision a need for another large-scale sale of securities from its (held-to-maturity) portfolio, if rates move materially higher than the current forward curve implies,” Raymond James analyst David Long said about SVB in a note to clients.

Larger banks do not face the same level of threat, but the falling value of bonds can impact their margins. That has helped drive the sector lower this week.

Diversified banks like Bank of...