| Throughout the 1990s, commercial banks increasingly turned to Federal Home Loan Bank advances to help plug the gap between strong loan growth and lagging core deposit growth. By end-of-year 1999, more than 60 percent of all commercial banks were Federal Home Loan Bank members and outstanding advances topped ;This dissertation attempts to answer the following question: how has FHLB membership and funding affected the balance sheets and income statements of commercial banks? In particular, has it altered banks' overall risk or their exposure to individual sources of risk, such as leverage risk, liquidity risk, credit risk, and interest rate risk? The increasing reliance of commercial banks, particularly community banks, on Home Loan Bank funding is a potential threat to bank safety and soundness because access to advances may undermine market discipline, and the Federal Deposit Insurance Corporation cannot raise premiums sufficiently to deter risk-taking.;Using quarterly income and balance sheet data for commercial banks in the 1990s, I assess the effect of Federal Home Loan Bank membership on bank risk. I also examine the relationship between dependence on Federal Home Loan Bank funding and risk among member banks. The evidence suggests that Federal Home Loan Bank members do exhibit somewhat riskier profiles than nonmembers and that risk does increase with dependence on advances. These differences, while statistically significant, do not appear to be economically large. I argue that high capital ratios have kept risk-taking in check. Nonetheless, bank supervisors should remain vigilant with respect to bank dependence on advances because its impact has not yet been tested in a serious economic downturn when bank capital ratios are expected to weaken. |
