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Is the Federal Home Loan Bank system good for banks? a look at evidence on membership, advances and risk

  • Dusan Stojanovic
  • Mark D. Vaughan
  • Timothy J. Yeager
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    Since the early 1990s, commercial banks have turned to Federal Home Loan Bank (FHLBank) advances to plug the gap between loan and deposit growth. Is this trend worrisome? On the one hand, advances implicitly encourage risk by insulating borrowers from market discipline. On the other, advances give borrowers greater flexibility to managing interest rate and liquidity risk. And access to FHLBank funding encourages members to reshape their balance sheets in ways that could lower credit risk. Using quarterly financial and supervisory data for banks from 1992 to 2000, we assess the effect of FHLBank membership and advances on risk. The evidence suggests liquidity and leverage risks rose modestly, but interest-rate risk declined somewhat. Credit risk and overall failure risk were largely unaffected. Although the evidence suggest FHLBank membership and advances have had, at best, only a modest impact on bank risk, we caution that the 1990s constitute one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms.

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    Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2005-02.

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    Date of creation: 2005
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    Handle: RePEc:fip:fedlsp:2005-02
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