Should the FDIC worry about the FHLB? The impact of Federal Home Loan Bank advances on the Bank Insurance Fund

Rosalind L. Bennett, Mark D. Vaughan and Timothy J. Yeager

No 05-05, Working Paper from Federal Reserve Bank of Richmond

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: Banks and banking; Financial institutions; Deposit insurance (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk and nep-ias
Date: 2005
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