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Should the FDIC worry about the FHLB? the impact of Federal Home Loan Bank advances on the Bank Insurance Fund

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  • Rosalind L. Bennett
  • Mark D. Vaughan
  • Timothy J. Yeager
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    Abstract

    Does growing commercial-bank reliance on Federal Home Loan Bank (FHLBank) advances increase expected losses to the Bank Insurance Fund (BIF)? Our approach to this question begins by modeling the link between advances and expected losses. We then quantify the effect of advances on default probability with a CAMELS-downgrade model. Finally, we assess the impact on loss-given-default by estimating resolution costs in two scenarios: the liquidation of all banks with failure probabilities above two percent and the liquidation of all banks with advance-to-asset ratios above 15 percent. The evidence points to non-trivial increases in expected losses. The policy implication is that the FDIC should price FHLBank-related exposures.

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    File URL: http://www.stlouisfed.org/banking/pdf/SPA/SPA_2005_01.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2005-01.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedlsp:2005-01

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    Keywords: Banks and banking ; Financial institutions ; Deposit insurance;

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    Cited by:
    1. W. Scott Frame & Diana Hancock & Wayne Passmore, 2012. "Federal Home Loan Bank Advances and Commercial Bank Portfolio Composition," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 661-684, 06.
    2. Thomas B. King & Daniel A. Nuxoll & Timothy J. Yeager, 2006. "Are the causes of bank distress changing? can researchers keep up?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 57-80.

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