Garnet Capital Advisors Blog

With deposits in decline, as Americans spend down their remaining stimulus funds, banks are once again faced with finding creative ways to satisfy liquidity requirements. For the majority of banks, that means turning to FHLB (Federal Home Loan Bank) for overnight loans to keep reserve levels adequate when they have less cash on hand. 

Fed Survey Finds FHLB Loans Popular

During a survey taken in November and released in January, 77 percent of banks said they were "very likely" to use FHLB loans to cover reserve deficiencies while another 14 percent said they "likely" would do so during the coming months.

Two-thirds of those surveyed said maintaining reserve levels to meet liquidity requirements set out in stress testing was the "most important" reason for turning to FHLB loans, while another 16 percent deemed it "important." 

FHLB loans were significantly more popular than other options for maintaining reserves, such as borrowing from unsecured markets, raising brokered deposits or certificates of deposit, and turning to the Fed's discount window. More than three-fourths of those surveyed (78 percent) said they were not likely to use the discount window, while none said they were likely to use it. 

About a third of respondents said they were looking to increase their reserves in the coming six months, while another third sought to keep theirs the same. 

Small Banks Do Turn to the Discount Window

One exception that the survey did not unearth is that small banks are more frequently turning to the Fed's discount window for loans to maintain liquidity.

The Fed reported in February that domestic banks borrowed $7.2 billion from the discount window in the third quarter of 2022, the most in two years since the early months of the pandemic. 

The increase was driven by banks with less than $3 billion in assets, which borrowed an average of four days from the discount window in 2022. Banks in other classes borrowed only two days that year from the discount window.

The increased activity reflects the 46 percent to 55 percent decline that banks with less than $10 billion in assets reported in their cash-to-assets ratio in the first nine months of 2022. 

The willingness of small banks to use the discount window shows there is less stigma to using that service for small banks, while it comes at a great discount. Borrowing from a Home Loan bank would cost 90 to 130 basis points more than from the discount window. Before the pandemic, Home Loan Bank loans were cheaper. 

A Potential Black Eye for FHLB

The positive appeal of FHLB loans comes on the heels of a report that Silvergate Holdings received a $4.3 billion advance from the FHLB of San Francisco to stave off a potential run on deposits related to crypto investments. 

The Federal Home Loan Bank system was established to help provide liquidity to banks to help with home purchases and developments. That allows the FHLB to hold a first-lien priority, so if an institution fails, the FHLB will receive the first payment while the remaining losses would fall to the FDIC. 

Many in the banking industry were concerned that FHLB providing an advance to a crypto-focused institution could lead the FDIC to hold the bag for these risky investments. 

Another Strategy for Balancing the Books

Banks also should consider selling or purchasing loan portfolios as a way to maintain their cash-to-assets ratios, depending upon how they are tilting toward out-of-balance. 

Garnet Capital Advisors can arrange partnerships between institutions to benefit both sellers and buyers. Contact our advisors today. 

Selling loan portfolios can be complicated and must meet strict government regulations, so having an experienced loan portfolio manager working with your institution will ensure you complete the transaction while remaining in compliance.