IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Federal Home Loan Bank advances and commercial bank portfolio composition

  • W. Scott Frame
  • Diana Hancock
  • Wayne Passmore

The primary mission of the 12 cooperatively owned Federal Home Loan Banks (FHLBs) is to provide their members financial products and services to assist and enhance member housing finance. In this paper, we consider the role of the FHLBs' traditional product--"advances," or collateralized loans to members--in stabilizing commercial bank members' residential mortgage lending activities. ; Our theoretical model shows that using membership criteria (such as a minimum of 10 percent of the portfolio being in mortgage-related assets) or using mortgage-related assets as collateral does not ensure that FHLB advances will be put to use for stabilizing members' financing of housing. Indeed, our model demonstrates that advances--a relatively low cost managed liability--are most likely to influence lending only when such liabilities are used to finance "relationship" loans (i.e., loans to bank-dependent borrowers) that will be held on a bank's balance sheet and are least likely to influence lending for loans where the loan rate is heavily influenced by securitization activities, like mortgages. ; Using panel vector autoregression (VAR) techniques, we estimate recent dynamic responses of U.S. bank portfolios to FHLB advance shocks, to bank lending shocks, and to macroeconomic shocks. Our empirical findings are consistent with the predictions of our theoretical model. First, recent bank portfolio responses to FHLB advance shocks are of similar magnitude for mortgages, for commercial and industrial loans, and for other real estate loans. This suggests that advances are just as likely to fund other types of bank credit as to fund single-family mortgages. Second, unexpected changes in all types of bank lending are accommodated using FHLB advances. Third, FHLB advances do not appear to reduce variability in bank residential mortgage lending resulting from macroeconomic shocks. However, some banks appear to have used FHLB advances to reduce variability in commercial and industrial lending in response to such macroeconomic shocks. Thus, relatively low cost managed liabilities may be used to finance "relationship" borrowers (which are typically business borrowers, rather than residential mortgage borrowers), although this use for advances appears to have diminished over time.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.federalreserve.gov/pubs/feds/2007/200731/200731abs.html
Download Restriction: no

File URL: http://www.federalreserve.gov/pubs/feds/2007/200731/200731pap.pdf
Download Restriction: no

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2007-31.

as
in new window

Length:
Date of creation: 2007
Date of revision:
Handle: RePEc:fip:fedgfe:2007-31
Contact details of provider: Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551
Web page: http://www.federalreserve.gov/

More information through EDIRC

Order Information: Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Berger, Allen N, 2003. " The Economic Effects of Technological Progress: Evidence from the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(2), pages 141-76, April.
  2. Hancock, Diana & Laing, Andrew J. & Wilcox, James A., 1995. "Bank capital shocks: Dynamic effects on securities, loans, and capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 661-677, June.
  3. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 190-210, May.
  4. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2004. "Resolving large financial intermediaries: banks versus housing enterprises," Working Paper 2004-23, Federal Reserve Bank of Atlanta.
  5. Grebler, Leo, 1973. "The Effect of FHLB Bond Operations on Savings Inflows at Savings and Loan Associations: Comment," Journal of Finance, American Finance Association, vol. 28(1), pages 198-202, March.
  6. Lawrence White & W. Scott Frame, 2004. "Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?," Working Papers 04-27, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  8. Patrick de Fontnouvelle & Victoria Garrity & Scott Chu & Eric Rosengren, 2005. "The potential impact of explicit Basel II operational risk capital charges on the competitive environment of processing banks in the United States," Basel II White Paper 4, Board of Governors of the Federal Reserve System (U.S.).
  9. Robert A. Eisenbeis & W. Scott Frame & Larry D. Wall, 2006. "An analysis of the systemic risks posed by Fannie Mae and Freddie Mac and an evaluation of the policy options for reducing those risks," Working Paper 2006-02, Federal Reserve Bank of Atlanta.
  10. Van Horne, James C, 1973. "The Effect of FHLB Bond Operations on Savings Inflows at Savings and Loan Associations: Comment," Journal of Finance, American Finance Association, vol. 28(1), pages 194-97, March.
  11. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-21, September.
  12. Lawrence J. White & W. Scott Frame, 2004. "Regulating Housing GSEs: Thoughts on Institutional Structure and Authorities," Working Papers 04-01, New York University, Leonard N. Stern School of Business, Department of Economics.
  13. Rosalind L. Bennett & Mark D. Vaughan & Timothy J. Yeager, 2005. "Should the FDIC worry about the FHLB? the impact of Federal Home Loan Bank advances on the Bank Insurance Fund," Supervisory Policy Analysis Working Papers 2005-01, Federal Reserve Bank of St. Louis.
  14. Brent W. Ambrose & Michael LaCour-Little & Anthony B. Sanders, 2004. "The Effect of Conforming Loan Status on Mortgage Yield Spreads: A Loan Level Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 541-569, December.
  15. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  16. Heuson, Andrea & Passmore, Wayne & Sparks, Roger, 2001. "Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 337-63, November.
  17. Goldfeld, Stephen M & Jaffee, Dwight M & Quandt, Richard E, 1980. "A Model of FHLBB Advances: Rationing or Market Clearing?," The Review of Economics and Statistics, MIT Press, vol. 62(3), pages 339-47, August.
  18. Kwon, Jene K & Thornton, Richard M, 1971. "An Evaluation of the Competitive Effect of FHLB Open Market Operations on Savings Inflows at Savings and Loan Associations," Journal of Finance, American Finance Association, vol. 26(3), pages 699-712, June.
  19. James B. Thomson, 2002. "Commercial banks’ borrowing from the Federal Home Loan Bank," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jul.
  20. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
  21. Silber, William L, 1973. "A Model of Federal Home Loan Bank System and Federal National Mortgage Association Behavior," The Review of Economics and Statistics, MIT Press, vol. 55(3), pages 308-20, August.
  22. Frame, W Scott & Srinivasan, Aruna & Woosley, Lynn, 2001. "The Effect of Credit Scoring on Small-Business Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 813-25, August.
  23. Rosalind L. Bennett & Mark D. Vaughan & Timothy J. Yeager, 2005. "Should the FDIC worry about the FHLB? The impact of Federal Home Loan Bank advances on the Bank Insurance Fund," Working Paper 05-05, Federal Reserve Bank of Richmond.
  24. Mark J. Flannery & W. Scott Frame, 2006. "The Federal Home Loan Bank system : the "other" housing GSE," Economic Review, Federal Reserve Bank of Atlanta, issue Q 3, pages 33-54.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2007-31. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.