6. Summary of Findings and Conclusion
federalreserve.gov
"In other words, FHLB(federal home loan bank) advances are fungible".
In principle, a relatively low cost for FHLB advances does not guarantee that loan rates for borrowers will be lower. Moreover, using membership criteria (such as a minimum of 10 percent of the portfolio being in mortgage-related assets) or using mortgage-related assets as primary collateral does not ensure that FHLB advances will be put to use for stabilizing members' financing of housing. Indeed, our theoretical model shows that subsidized funding is most likely to be used for "relationship" loans (i.e., loans to bank-dependent borrowers) that will be held on a bank's balance sheet and are least likely to be used for loans where the loan rate is heavily influenced by securitization activities. Thus, it is an empirical question whether FHLB advances result in mortgage credit being more available or result in more stable mortgage credit markets.
Using a panel VAR approach, we estimate commercial bank top holders' responses to unexpected FHLB advances, to unanticipated changes in their portfolio, and to shocks in macroeconomic conditions. With regard to shocks to FHLB advances, confidence intervals for C&I lending responses and for mortgage lending responses overlapped one another in both periods considered. This implies that advance shocks change C&I and mortgage lending in a similar fashion.
Loan shocks, perhaps due to an increase in demand for loans of a specific type, appear to be accommodated by FHLB members by using advances, regardless of the loan type. A one-standard deviation (positive) loan shock (for mortgages, for commercial and industrial loans, or for other real estate loans) resulted in (positive) statistically significant changes in FHLB advances in both periods considered, regardless of the top holder size group. Interestingly, advance responses were larger for mortgages than for C&I lending and other real estate lending for all top holder size groups in the 1997-2000 period, but these differences were generally not material in the 2001-2006 period. These findings suggest that FHLB advances are used to accommodate changes in the demand for all types of loans across bank's portfolios. That is, our findings support the view that FHLB advances are like other forms of non-deposit bank funding and will be put to use to increase the overall return for a banking organization.
With respect to macroeconomic shocks (i.e., federal funds rate shocks and GDP shocks), smaller institutions with advances have smaller (negative) responses than do smaller institutions without advances. This is true for both mortgage and C&I lending. These findings are consistent with smaller institutions using FHLB advances for their bank dependent (relationship-based) borrowers. Across time, there has been a diminished difference in responses to macroeconomic shocks across smaller institutions with and without advances. This finding is consistent with smaller institutions having a wider availability of wholesale funding options more recently. In contrast, large top holders with and without advances had similar responses of their loan portfolio to such macroeconomic shocks. This finding is consistent with the view that these lenders tend to make loans to less bank-dependent borrowers (i.e., borrowers with more collateral or higher net worth) than smaller top holders who are more likely to specialize in relationship-based loans
Overall, our findings are consistent with the view that FHLB advances are not special, but rather are a general source of liquidity. The bulk of the empirical evidence suggests that FHLB advances are not connected to mortgage funding in the sense of uniquely funding mortgages or stabilizing mortgage funding. In other words, FHLB advances are fungible. |
