Blessing Or Curse? Community Banks’ Use Of Federal Home Loan Bank Advances

Abstract

Banks enjoyed record profitability during the nineties, as the economy grew and loan demand followed. Deposit growth did not keep pace so many banks sought alternative funding, including Federal Home Loan Bank advances which have potential risk-increasing incentives. The results show that advance-using banks operate with much higher levels of loans to assets, much lower levels of capital, and extend commitments for future lending at a greater rate than banks that do not use advances. A logistic regression finds high loans, and low deposits and equity (all as a percent of assets) are key predictors of FHLB advance use. Also, for the banks examined, there is a concentration of advance users among the banks with the lowest capital and highest levels of non-performing loans. These results offer insight for future research as well as focus for supervisory scrutiny of FHLB advance-using banks.