The Federal Home Loan Bank (FHLBank) System, a network of 11 regional government-sponsored enterprises (GSEs) established in 1932, provides member financial institutions with reliable funding through collateralized loans called advances. This report examines whether the FHLBank System effectively fulfills its mission of enhancing US banks' liquidity and financial stability, particularly during periods of financial distress. Using call report data from 2002 to 2024, we conducted a four-part empirical analysis to examine whether FHLBank advances are used more when banks face liquidity constraints, whether advances enhance individual bank financial stability, whether membership reduces the likelihood of bank failures, and whether advances reduce systemic risk in the overall banking system.

Why This Matters

The FHLBank System serves more than 6,000 member institutions. This research provides comprehensive bank-level analysis of how FHLBank membership and advances affect individual bank stability and overall financial system risk, informing ongoing policy discussions about the system's value.

What We Found

From rigorous quantification through regression analyses, we find the following:

• Liquidity support. Member banks increase FHLBank borrowing when liquidity tightens. Regression analysis shows that a 1 percentage-point drop in liquid assets corresponds to a 0.37 point increase in advances.
• Improved solvency. FHLBank funding strengthens individual bank resilience. A 1 percentage-point rise in advances (as a share of assets) increases a bank's z-score—which measures a bank’s capital and returns divided by its volatility (a proxy for bank solvency)—by 19 points on average.
• Lower failure risk. FHLBank membership reduces the likelihood of bank failure. Probit analysis found FHLBank membership reduces the bank failure rate by about 10 percent after controlling for all other variables. This effect is even stronger for banks with higher solvency risks.
• Reduced systemic risk. FHLBank advances reduce the banking system's overall risk. The impulse response function shows that a 1 percent increase in advances is associated with a persistent 0.30 percentage-point decline in the CATFIN (Conditional Tail Financial Risk Indicator) index, a measure of systemic risk.

Our analysis suggests that the overall economic benefits of mitigating bank financial distress and systemic crises exceed the benefits the FHLBank System receives from its GSE status.

How We Did It

We conducted four separate empirical analyses using different datasets and methods. Using quarterly Federal Deposit Insurance Corporation call reports from 2002 to 2024, we ran fixed-effect regression models to examine the relationship between liquidity constraints and advance usage, and a separate fixed-effect model to examine how advances affect individual bank solvency risk. We used probit analysis with the same call report data to compare failure rates between FHLBank members and nonmembers, controlling for bank size and financial condition. Finally, we analyzed advance data alongside the CATFIN systemic risk index, using vector autoregression analysis and impulse response functions to assess how advances affect overall banking system stability.