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Recent data show a sharp rise in Federal Home Loan Bank borrowing, but the increase does not necessarily signal widespread funding stress across the banking industry. For many financial institutions, FHLB advances are simply another tool for managing liquidity, supporting loan growth and controlling marginal funding costs.
Combined FHLBank advances increased approximately 20% during the first half of 2026, rising from $676.7 billion to $810.7 billion. However, much of that growth came from larger members rather than from a broad-based increase across all financial institutions.
Credit union advances declined by nearly 4% during the same period, while community bank advances remained relatively stable, increasing by only about 1.7% based on first- and second-quarter industry data.
The more important question is not whether a financial institution should use FHLB borrowing. Instead, management teams should determine when an advance makes economic sense and how it fits into the institution’s overall funding strategy.
FHLB Advances and Deposit Funding: What Institutions Need to Know
- FHLB advances can help bridge funding gaps caused by loan growth or deposit volatility.
- Wholesale advances may offer a competitive marginal funding cost compared with deposit promotions.
- The correct comparison is usually the marginal cost of retaining or acquiring deposits, not the average cost of all deposits.
- Flexible advance terms can give asset-liability committees more control over funding structure and interest rate exposure.
- FHLB borrowing is most effective when used alongside a strong and diversified deposit franchise.
The choice between borrowing and repricing deposits can affect earnings, liquidity, interest rate risk and balance sheet flexibility. As a result, institutions should evaluate the full economics of each funding source before launching a deposit campaign or drawing on wholesale liquidity.
Advantages of Using FHLB Advances
1. Reliable Access to Liquidity
FHLB advances provide eligible members with a dependable source of wholesale funding. They can be especially valuable when deposit growth slows, loan demand accelerates or an institution experiences a temporary liquidity mismatch.
Some Federal Home Loan Banks offer same-day funding up to an institution’s available borrowing capacity. This speed can help management address timing differences between asset growth and liability inflows while also strengthening a contingency liquidity plan.
Advances can therefore serve as a bridge rather than a permanent replacement for deposits. They may allow an institution to meet short-term funding needs without immediately increasing deposit rates across a large portion of the balance sheet.
2. A Potentially Lower Marginal Funding Cost
A deposit promotion may appear less expensive than wholesale funding when management compares only the advertised interest rate. However, the actual cost can be much higher after accounting for balance migration and deposit cannibalization.
For example, assume a bank offers a 3.00% promotional rate and receives an equal mix of new money and balances transferred from an existing account paying 1.00%. If only half of the campaign’s deposits represent new funds, the effective marginal cost of the new funding may be close to 5.00%.
If a comparable FHLB advance is available at a rate between 4.00% and 4.25%, the advance could represent the lower-cost option for raising incremental liquidity.
The precise calculation will depend on deposit behavior, campaign performance, product migration and the amount of genuinely new money attracted. The broader lesson is that institutions should compare the known cost of an advance with the complete economic cost of a deposit campaign rather than relying on posted rates alone.
3. Greater Funding and Asset-Liability Management Flexibility
FHLBs offer a range of funding structures, including fixed-rate and floating-rate advances, overnight funding, longer-term maturities, amortizing structures and callable or putable options.
This flexibility enables an asset-liability committee, or ALCO, to align funding terms more closely with asset cash flows, expected loan repayments and interest rate exposure. It can also help management manage liability duration and reduce the risk of creating an unwanted concentration in short-term deposits.
Deposits do not always arrive in the amount, maturity or pricing structure an institution needs. FHLB advances can help fill those gaps with greater precision.
Potential Drawbacks and Risks of FHLB Borrowing
1. Increased Reliance Requires Contingency Planning
FHLB advances are designed to provide stable liquidity during normal operating conditions. However, access to this funding depends on an institution’s financial condition, eligible collateral and remaining borrowing capacity.
The Federal Housing Finance Agency has emphasized that the FHLB System is not intended to function as a lender of last resort for troubled institutions. Financial institutions that increase their use of advances should therefore monitor funding concentrations, maturity concentrations and the availability of alternative liquidity sources.
Management should also consider how quickly each funding source can be accessed during a period of market stress. A funding plan that looks adequate on paper may be less effective if collateral cannot be mobilized quickly or if access to a particular source becomes constrained.
2. Collateral Must Be Managed Actively
FHLB advances are secured by qualifying loans or investments. These assets are subject to collateral haircuts, which can reduce borrowing capacity. Changes in market conditions, interest rates or asset values may also affect the amount of funding available.
Collateral cash flows can become less predictable at the same time liquidity needs are increasing. In addition, haircuts and eligibility requirements may change as economic conditions evolve.
Institutions should maintain a clear understanding of which assets are pledged, how much additional collateral is available and what steps are required to make more assets eligible for borrowing. Maintaining sufficient pledged collateral and unused capacity before funding is needed can improve liquidity preparedness.
How Banks Can Use FHLB Advances Strategically
A sound FHLB funding strategy begins with a complete view of available liquidity. Management should evaluate on-balance-sheet liquidity together with FHLB capacity, Federal Reserve borrowing capacity, brokered funding and other contingent sources.
Each source should be assessed according to its cost, availability, speed of access, collateral requirements, maturity and effect on interest rate risk.
1. Bridge Temporary Deposit Volatility
Short-term FHLB advances can help cover temporary funding gaps without forcing an institution to make a permanent deposit pricing decision. This approach may be useful when deposit outflows are seasonal or when management expects balances to recover.
2. Support Profitable Loan Growth
Wholesale funding may help an institution support attractive loan growth when deposits are not keeping pace. However, the analysis should include the full economics of the loan, including credit costs, capital usage, servicing expenses, liquidity requirements and the cost of funding.
3. Compare Full Marginal Funding Costs
Deposit campaigns should be evaluated using more than the advertised rate. Management should account for balance migration, cannibalization of existing products, marketing expenses, operational costs and the expected duration of the new balances.
That total cost should then be compared with the pricing and structure of an available FHLB advance.
4. Manage Maturity and Interest Rate Risk
The term and structure of an advance should align with the institution’s existing rate exposure and expected asset cash flows. In some cases, the right advance can address both a funding requirement and a broader asset-liability management objective.
5. Preserve Borrowing Capacity
Institutions should pledge enough eligible collateral to support expected borrowing needs while maintaining a reasonable reserve for unexpected liquidity events. Management should understand how collateral values, eligibility standards and haircuts could affect available capacity.
The Right Funding Strategy Is Not One-Size-Fits-All
The goal should not be to eliminate FHLB borrowing or to maximize its use. Instead, management should understand the cost of each incremental dollar of funding, the flexibility it provides and its effect on the institution’s balance sheet.
FHLB advances can be an effective tool for managing liquidity, funding loan growth and improving balance sheet flexibility. When used deliberately, they can complement a healthy deposit franchise and reduce the need to launch costly deposit campaigns at the wrong time.
The best funding decision will depend on each institution’s liquidity position, deposit behavior, collateral availability, borrowing capacity, loan demand and interest rate outlook.
About the Author
Michael Hunker is a director at Darling Consulting Group. He works with financial institutions to improve deposit and loan strategies through risk management and data analytics. Hunker previously served as an asset-liability manager at First Tech Federal Credit Union and holds degrees in accounting and finance. He is also a Certified Treasury Professional.
Disclaimer: This article is intended for general informational purposes only and does not constitute financial, investment, legal or professional advice. Examples are illustrative, and actual results may vary. The availability, cost and effectiveness of any funding strategy depend on an institution’s financial condition, liquidity position, collateral, borrowing capacity, market conditions and other circumstances.
Source: TheFinancialBrand.com