A Note on the Impact of FHLB Advances on the Cost and Availability of Funds at S&Ls

Abstract

loans to the S&Ls from the Federal Home Loan Bank (FHLB) system in the form of advances financed by the sale of open market debt instruments. The question of the net impact of these FHLB advances on the availability of investable funds to S&Ls has engendered considerable interest and comment in the finance literature in recent years.2 Previous research on this subject has concentrated on the issue of whether FHLB borrowing in the open market induces disintermediation at the S&Ls. Studies by Kwon and Thornton [8, 9] and Kaufman [6] provide empirical results suggesting that the financing of FHLB advances does, indeed, result in some degree of disintermediation. Fortune's study [3] extends the results of previous research by attempting to measure the extent to which this disintermediation offsets the beneficial impact of FHLB advances on the flow of investable funds to S&Ls. The major purpose of these studies is to estimate the efficiency of FHLB assistance. The greater the amount of disintermediation from the financing of FHLB advances, the smaller the net increase in fund availability to S&Ls and the less efficient is this form of federal assistance. The effect of FHLB borrowing on disintermediation, however, is only one aspect of the full impact of the FHLB operations. Even the degree to which FHLB advances are offset by disintermediation is an inadequate measure of the merits of the FHLB advance system. The channel by which funds are distributed to S&Ls is significant only if it measurably alters the net flow of investable funds to these intermediaries and/or the price that they must pay to obtain funds. The appropriate criterion for judging the merits of FHLB advances as a method of channeling funds to S&Ls is the influence of this channel on the availability and the cost of funds to these institutions.