Higher interest rates decrease the value of long-duration bonds even in nominal terms. Think of it this way: because the interest rate on a bond is fixed at issue, and because newer bonds now have higher interest rates, your existing bonds have to be sold for less in order for someone to buy them over a newer higher-interest bond. This means that the banks' reserves have actually shrunk in value. This is made worse by the fact that the combination of low interest rates and requirements to choose safe investments means that the only way for banks to meet their cost of operations is by picking longer-duration bonds which have higher drops in value, and that they haven't been earning enough interest to really grow their reserves either.
That’s only relevant if you need to sell it or use mark to market accounting.
The US banking system has been given a great deal of regulatory leeway due to recent economic turbulence, including setting reserve requirements to 0%. So market value is only relevant if they need to sell before maturity.
Banks generally have liquid reserves to handle significant fluctuations in deposits. If that’s insufficient they have incoming cash flow and the option to borrow money to make up the difference rather than instantly selling assets.
Thus in practice extracting 5% over a week is fine but there’s a threshold that will kill any bank.
