Should the Fdic Worry About the Fhlb? The Impact of Federal Home Loan Bank Advances on the Bank Insurance Fund

FRB of St. Louis Supervisory Policy Analysis Working Paper No. 2005-01

FDIC Center For Financial Research Working Paper Series

45 Pages Posted: 4 Aug 2005

See all articles by Rosalind L. Bennett

Rosalind L. Bennett

FDIC, Division of Insurance and Research

Mark D. Vaughan

Federal Reserve Bank of St. Louis, Research Division

Timothy J. Yeager

University of Arkansas - Sam M. Walton College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

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.

Keywords: Deposit-insurance pricing, Federal Deposit Insurance Corporation (FDIC), Federal Home Loan Bank (FHLB), moral hazard, secured funding

JEL Classification: G21, G28, K23

Suggested Citation

Bennett, Rosalind L. and Vaughan, Mark D. and Yeager, Timothy J., Should the Fdic Worry About the Fhlb? The Impact of Federal Home Loan Bank Advances on the Bank Insurance Fund (July 2005). FRB of St. Louis Supervisory Policy Analysis Working Paper No. 2005-01, FDIC Center For Financial Research Working Paper Series, Available at SSRN: https://ssrn.com/abstract=765604 or http://dx.doi.org/10.2139/ssrn.765604

Rosalind L. Bennett

FDIC, Division of Insurance and Research ( email )

550 Seventeenth Street, NW
Washington, DC 20057
United States
202-898-7160 (Phone)

Mark D. Vaughan (Contact Author)

Federal Reserve Bank of St. Louis, Research Division ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Timothy J. Yeager

University of Arkansas - Sam M. Walton College of Business ( email )

Fayetteville, AR 72701
United States

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