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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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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 05-05.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedrwp:05-05

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

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    References

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    1. Dusan Stojanovic & Mark D. Vaughn & Timothy J. Yeager, 2001. "Do Federal Home Loan Bank membership and advances lead to bank risk-taking?," Proceedings 707, Federal Reserve Bank of Chicago.
    2. Ben Craig & James Thomson, 2003. "Federal Home Loan Bank Lending to Community Banks: Are Targeted Subsidies Desirable?," Journal of Financial Services Research, Springer, vol. 23(1), pages 5-28, February.
    3. Rebel A. Cole & Jeffery W. Gunther, 1995. "FIMS: a new monitoring system for banking institutions," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 1-15.
    4. Michael Falkenheim & George Pennacchi, 2003. "The Cost of Deposit Insurance for Privately Held Banks: A Market Comparable Approach," Journal of Financial Services Research, Springer, vol. 24(2), pages 121-148, October.
    5. Rebel Cole & Jeffery Gunther, 1998. "Predicting Bank Failures: A Comparison of On- and Off-Site Monitoring Systems," Journal of Financial Services Research, Springer, vol. 13(2), pages 103-117, April.
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    7. Goldberg, Lawrence G. & Hudgins, Sylvia C., 2002. "Depositor discipline and changing strategies for regulating thrift institutions," Journal of Financial Economics, Elsevier, vol. 63(2), pages 263-274, February.
    8. Cooperstein Richard L. & Pennacchi George G. & Redburn F. Stevens, 1995. "The Aggregate Cost of Deposit Insurance: A Multiperiod Analysis," Journal of Financial Intermediation, Elsevier, vol. 4(3), pages 242-271, July.
    9. Joe Peek & Eric S. Rosengren, 1996. "Will legislated early intervention prevent the next banking crisis?," Working Papers 96-5, Federal Reserve Bank of Boston.
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    12. Billett, Matthew T. & Garfinkel, Jon A. & O'Neal, Edward S., 1998. "The cost of market versus regulatory discipline in banking," Journal of Financial Economics, Elsevier, vol. 48(3), pages 333-358, June.
    13. Wayne Passmore, 2003. "The GSE implicit subsidy and value of government ambiguity," Finance and Economics Discussion Series 2003-64, Board of Governors of the Federal Reserve System (U.S.).
    14. R. Alton Gilbert, 1990. "Market discipline of bank risk: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-18.
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    16. William Poole, 2003. "Housing in the macroeconomy," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-8.
    17. Stavros Peristiani, 1998. "The Growing Reluctance To Borrow At The Discount Window: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 611-620, November.
    18. W. Scott Frame, 2003. "Federal Home Loan Bank mortgage purchases: Implications for mortgage markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 17-31.
    19. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
    20. Darrell Duffie & Robert Jarrow & Amiyatosh Purnanandam & Wei Yang, 2003. "Market Pricing of Deposit Insurance," Journal of Financial Services Research, Springer, vol. 24(2), pages 93-119, October.
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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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