The Federal Reserve Board of Governors has issued an enforcement action against an Illinois community bank, citing concerns about liquidity and interest rate risk management, among other topics.
The Federal Reserve entered into a written agreement with Du Quoin, Illinois-based Du Quoin State Bank, and its holding company, Perry County Bancorp Inc., on April 26. The agreement did not specify the problems at the bank with assets of $137 million, but noted that multiple “deficiencies” were identified during a recent examination by supervisors at the Federal Reserve Bank of St. Louis.
Until the various regulatory issues are resolved, the bank will be prohibited from incurring debt, redeeming its own shares or paying dividends or distributions without the approval of state and federal regulators. You will also be prohibited from buying or selling assets that exceed 5% of your total assets without the approval of your regulators.
The root cause of Du Quoin State Bank’s problems was not discussed in the 10-page written agreement. Such enforcement actions generally do not include summaries of the bank’s deficiencies, but focus solely on the requirements being imposed.
Du Quoin could not immediately be reached for comment on Thursday.
Still, the order comes at a time when supervisors, and in particular the Federal Reserve, are on high alert over both interest rate risks and problems with liquidity management. Both problems have played a central role in the recent banking crisis, contributing to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in the past two months.
In addition to creating plans to address liquidity and funding management policies, as well as interest rate risks, Du Quoin must also design a new capital plan, investment policy and board supervision regime. .
The Fed also wants Perry County Bancorp to serve as a source of strength for its bank and to ensure that steps are taken to bring the bank into future regulatory compliance.
Du Quoin and Perry County Bancorp will also have to submit quarterly advances to the Fed and state regulators in Illinois.
As the Fed rapidly raised its benchmark interest rate to combat inflation, rates by 5 percentage points since last March to its highest level since 2007: Many banks have taken paper losses on government-backed debt investments. As interest rates rise, the market value of older bonds decreases because market participants are able to earn better returns on newer bonds that pay at higher rates.
An American Banker investigation in March found that dozens of community banks across the country have seen these unrealized losses accumulate on their balance sheets. Such depreciation is only problematic if banks actually sell the bonds and crystallize your losses. If the bonds are held to maturity, they will generate the full expected returns. However, amid the recent crisis of confidence in small and regional banks, the possibility is rising that some banks may have to take losses to satisfy clients’ deposit withdrawal requests.
Banking supervisors have been involved in the issue ever since in except last fall, when the Fed flagged it as a top concern in its semi-annual report on supervision and regulation. Still, officials say most depositories handle this set of risks well.
“Most banks are very effective at managing interest rate risk and liquidity risk,” Fed vice president for supervision Michael Barr told the Senate Banking Committee in March. “It’s the kind of bread and butter job of bank management.”
Earlier this week, Fed Chairman Jerome Powell said that supervisors have focused on improving liquidity and risk management in the banking system, noting that many banks have taken it upon themselves to address the issue directly.
“A lot of banks are now catering to liquidity and taking the opportunity now, really since the events of early March, to build liquidity,” Powell said during a news conference this week.