For the first time during the two-month banking crisis, the Federal Reserve took public action against a bank that saw its capital turn negative as a result of underwater bond investments.

But the question is: is it something unique or more of a trend?

“They should be using hammers more often, like this one,” said Bartlett Naylor, a financial policy advocate at consumer advocacy group Public Citizen, adding that he welcomed the Fed “using its full set of authorities to keep safe to the banks.”

He action v. Du Quoin State Bank in southern Illinois cites serious deficiencies in its management of interest rate risk, the same vulnerabilities that played a key role in the failure of Silicon Valley Bank. Other banks may be facing similar regulatory actions that are not yet public.

Du Quoin converted the deposits that flooded its doors during the pandemic into securities, mostly municipal bonds. He had amassed some $103 million in assets by the end of 2021, or 73% of his assets.

That became a problem when the Fed raised interest rates aggressively in 2022. Although the bank’s capital is now back in the green, meaning its assets are now once again worth more than its liabilities, that was not the case last year. last year.

The value of its bonds had plunged 18% when long-term rates peaked last year, a loss that left the bank with negative equity. It didn’t help that Du Quoin State Bank appeared to have invested in longer-term bonds, said banking consultant Bert Ely. Longer-term bonds look more lucrative, as they generally pay more than shorter-term securities, but they also suffer more when rates rise on newer bonds, as the buyer is stuck with lower-yielding assets for longer. time.

“The further you go down the yield curve, the worse you’ll be hit when rates go up,” Ely said.

The bank did not immediately respond to a request for comment.

Du Quoin State Bank’s woes are far from typical, as many banks appeared to have done a better job managing their exposure to rising interest rates. But he was not the only one with significant exposures.

A US banker analysis in March it showed that about 90 banks, or 2% of the country’s more than 4,700 banks, would lose their capital or come dangerously close to it if they were forced to absorb their bond losses. Losses remain “unrealized” and notional unless banks are forced to sell their bonds early, as they would sell them for less than they originally bought them.

In February, the Fed’s Board of Governors received a staff presentation raising concerns about unrealized losses at some banks. “Banks with large unrealized losses face significant safety and soundness risks,” the filing said, noting 31 banks that had negative equity. The presentation also said that at the end of the third quarter, when rates were near their highest level, some 722 banks had unrealized losses exceeding 50% of their capital.

Since then, the number of banks issuing has decreased due to falling long-term rates. led to improvements in bond values.

The presentation pointed to Silicon Valley Bank, which would fail weeks later, as a prime example of those risks. The Fed made the presentation public as part of your review about what went wrong in his oversight of Silicon Valley Bank.

When asked about this week’s filing, Powell said the filing did not mark the issue as “urgent or alarming” and did not mention the risk of a bank run putting additional pressure. He also noted that the presentation outlined the steps that Fed supervisors were taking to address the problem.

At banks with less than $100 billion in assets, supervisors stepped up scrutiny of low and declining net worth institutions, including targeted examinations of banks with negative net worth. The largest banks were facing increased scrutiny of their exposure to interest rate increases and their impact on earnings, liquidity and capital, according to the filing.

Fed Vice President of Supervision Michael Barr said last month that regulators need to reassess how “we oversee and regulate a bank’s interest rate risk management.”

“While interest rate risk is a core banking risk that is not new to banks or supervisors, SVB did not adequately manage its interest rate risk and supervisors did not force the bank to fix these issues with the fast enough,” Barr wrote in a report. outlining the conclusions of her review of the bank’s supervisory issues.

The problems at Du Quoin State Bank have escalated into a public enforcement action, one of the harshest tools the regulator takes when seeking to force improvements on a bank. Before making the issue public, the Fed generally flag problems for banks to fix privately, downgrade their confidential supervisory ratings, or issue non-public enforcement actions.

The enforcement action says the bank “began to take corrective action to address deficiencies that were identified in recent examinations” by banking regulators at the St. Louis Fed and Illinois.

Regulators prevent the bank from paying dividends without prior approval and force it to present plans to improve its capital, liquidity and investment policies. The bank must also submit a plan establishing “adequate guidelines and systems, including an effective model, to measure, monitor and control the Bank’s interest rate risk,” the enforcement action said.

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