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The Real Story Behind the Surge in FHLB Advances: Macroprudential Policy Changed How Banks Borrow

In the wake of the 2008 global financial crisis and ensuing regulatory reforms, U.S. banks dramatically altered their sources of funding. Funding from non-deposit sources now accounts for only 13 percent of bank liabilities, compared with more than 30 percent 10 years ago. However, bank funding from Federal Home Loan Banks (FHLBs) has not followed suit. Money market fund reform, like FHLB advances, designed to strengthen financial stability may have unintentionally exposed taxpayers to potential banking system losses.

In this paper, we show that the use of FHLB advances accelerated following regulatory changes to money market funds. These regulatory changes lowered the cost of FHLB advances, and also had the effect of shortening the maturity of FHLBs obligations to satisfy the needs of MMFs. We conclude with some policy considerations.