How do community banks access liquidity during funding stress events?

Patrick Herb and Raymond Kim

Finance Research Letters, 2025, vol. 80, issue C

Abstract: We examine how community banks access liquidity during funding stress events. We find a liquidity facility utilization pecking order, in which Federal Home Loan Bank (FHLB) advances are the most utilized liquidity facility, followed by the federal funds market, followed by repurchase agreements. We also find that balance sheet liquidity affects the utilization of liquidity facilities. During funding stress events, banks that have relatively more liquid balance sheets increase their utilization of repurchase agreements and federal funds, and decrease their utilization of FHLB advances, while banks with relatively more illiquid balance sheets increase their utilization of FHLB advances, and decrease their utilization of repurchase agreements and federal funds. Our findings suggest that the FHLB is fulfilling its mission to provide liquidity to its members and support housing finance, and may be the preferred lender of last resort for community banks.

Keywords: Liquidity; Banks; Federal home loan; Repurchases; Federal funds; Deposit runs (search for similar items in EconPapers)
JEL-codes: E02 E50 G20 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:80:y:2025:i:c:s1544612325006014

DOI: 10.1016/j.frl.2025.107338

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