Fed survey: Home Loan bank advances are popular liquidity fallback for banks

By: ameer@trustedteam.com

Federal Home Loan bank advances are a popular option for banks facing falling reserve balances, a recent survey from the Federal Reserve found.

Among banks that are members of the Federal Home Loan Bank System, more than three-quarters of respondents would “very likely” turn to advances to increase reserve balances, according to the Fed’s most recent senior financial officer survey, released Friday afternoon.

Along with the 77% of respondents who rated their likelihood of turning to advances to replenish their reserves as “very likely,” another 14% said they would be “likely” to turn to Home Loan bank advances, according to the survey. The next most popular option was borrowing from unsecured markets, such as the federal funds market, followed by raising brokered deposits or certificates of deposit.

The Marriner S. Eccles Federal Reserve building stands in Washington.

A survey of senior financial officers conducted by the Federal Reserve found that a wide majority of Federal Home Loan Bank System members would turn to Home Loan bank advances to meet liquidity demands.

Bloomberg News

The least popular option among the officers surveyed was turning to the Fed’s discount window, with 78 percent saying they were not likely to use that option and none saying they would be very likely to do so.

The most important reason for maintaining a certain level of reserves is to satisfy liquidity requirements determined by stress testing, with 66% of respondents saying that was a very important consideration and another 16% saying it was important.

Typically conducted twice a year by the Federal Reserve Bank of New York, the Fed’s senior financial officer survey is a poll of officials at 80 banks, covering a range of asset sizes and business models. The survey, conducted Nov. 4-Nov. 18, focused on balance sheet management expectations for the months ahead, views on reserve preferences and expectations about the effects of the Fed’s interest rate changes.

The institutions surveyed accounted for nearly three- quarters of the reserves in the banking system. Only 44 of the officers surveyed represented Home Loan Bank System member banks.

The Fed’s finding comes on the heels of a report that Silvergate Bank took out a $4.3 billion advance from the Federal Home Loan Bank of San Francisco last year. The action by the crypto-focused La Jolla, California, bank took the advance to help stave off a run on its deposits.

Home Loan banks are private institutions that were established by the government to provide liquidity to banks that help finance housing purchases and developments. Silvergate’s use of a Home Loan bank advance to offset crypto-related losses has rankled some in and around the bank regulatory space. Such advances are given first-lien priority, meaning if an institution becomes insolvent, the advance would be repaid first, an arrangement that skeptics say shifts the burden onto the Federal Deposit Insurance Corp.

“The Home Loan banks love to say that they’ve never lost a nickel and that’s because they have a prior lien ahead of the FDIC,” Federal Financial Analytics managing partner Karen Petrou told American Banker. “The $4.3 billion is clearly at risk and it leaves the FDIC holding the bag.”

The Fed’s survey found that many banks wanted to maintain or augment their reserve holdings in the coming months. Roughly one-third of respondents said they would take steps to keep the same level of reserves or add more in the coming six months, while another third said they would leave their reserve levels alone.

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