Broad Bank Selloff Obscures Some Firms' Rate-Hike Resistance

Fear that a more aggressive Fed will hurt banks' profits prompted a selloff across the financial-services sector Thursday. But that fear is blind, according to bank-stock analysts and investors who contend that some financial institutions are well protected against further tightening.

Economic data released Thursday morning indicated that inflation is building in the economy, prompting many observers to conclude that the Fed is likely to get tougher with its interest-rate policy.

A trigger-happy central bank is usually bad news for bank stocks. When rates are pushed up, banks' borrowing costs generally rise faster than the interest rates on the money they lend. This squeezes profit margins and reduces customer demand for loans. Plus, if higher rates slow the economy, borrowers begin to default, forcing banks into earnings-eroding charges against profits. ...