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Since the early 1990s, commercial banks have turned to Federal Home Loan Bank (FHLBank) advances to plug the gap between loan and deposit growth. Is this trend worrisome? On the one hand, advances implicitly encourage risk by insulating borrowers from market discipline. On the other, advances give borrowers greater flexibility to managing interest rate and liquidity risk. And access to FHLBank funding encourages members to reshape their balance sheets in ways that could lower credit risk. Using quarterly financial and supervisory data for banks from 1992 to 2005, we assess the effect of FHLBank membership and advances on risk. The evidence suggests liquidity and leverage risks rose modestly, but interest-rate risk declined somewhat. Credit risk and overall failure risk were largely unaffected. Although the evidence suggest FHLBank membership and advances have had, at best, only a modest impact on bank risk, we caution that our sample period constitutes one observation and that moral hazard could be pronounced if leverage ratios revert to historical norms.

Since the early 1990s, commercial banks have turned to Federal Home Loan Bank (FHLBank) advances to plug the gap between loan and deposit growth. Between 1992 and 1999, for example, annual loan growth at US commercial banks averaged 7.6% while annual core deposit growth averaged just 3.0%. The pickup in loan growth in the 1990s reflected the length and strength of the economic expansion while the slowdown in core-deposit growth reflected heightened consumer interest in deposit substitutes such as money-market mutual funds. Between 2000 and 2005, the economic recession and the stagnant stock market brought loan growth and core deposit growth more in line, with each growing at an annual rate of just over 7%. Nevertheless, FHLBank advances remain an important and growing source of bank funding.

In the last several years, commercial banks have relied on FHLBank advances to help plug the gap between loan growth and core deposit growth. The increasing reliance is a potential safety and soundness concern because access to advances can undermine market discipline, and the Federal Deposit Insurance Corporation cannot raise premiums sufficiently to deter risk-taking. Using quarterly income and balance sheet data between 1992 and 2005, we assess the effect of Home Loan Bank membership and advances on bank risk. The evidence suggests that Home Loan Bank members do exhibit somewhat riskier leverage and liquidity profiles than nonmembers and that risk does increase with dependence on advances, especially after 1999. But, the differences, thus far at least, do not appear to be large. In addition, member banks have lower interest rate sensitivity and no significant change in overall risk.