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, according to a report from the Associated Press.
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 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 that banks can use should there be a downturn in the future.
However, when depositors grow anxious and begin withdrawing their money, banks sometimes must sell those bonds before they mature to cover the exodus of deposits.