What is an advance?
An advance is a fully secured loan made by a Federal Home Loan Bank (FHLBank) to one of its member institutions. Advances support members' local lending activities and make liquid otherwise illiquid assets.
For what purpose does a member institution (member) require an advance?
Members generally use advances for three interrelated purposes: to supplement deposits when deposit growth is insufficient to fund local loan demand; to manage interest rate risk; and as a source of liquidity to meet short term obligations or when other sources of funds are not available in the quantity needed.
How does a member institution qualify for an advance?
A member must pledge high-quality collateral, in the form of government securities, single family mortgage loans, non-residential real estate loans or loans on small business, agriculture or community development. Statute and regulation require that all advances are fully secured by eligible collateral.
In addition, the member must purchase additional stock in its FHLBank, proportionate to the new borrowing. (FHLBank stock is held at par value and not traded.) FHLBanks continually evaluate the creditworthiness of each member to determine the appropriate limits on the amount of advances and the collateral pledging arrangements.
How quickly is an advance provided to a member?
The process is almost instantaneous, once a Federal Home Loan Bank approves the member's request.
What are the terms of an advance?
Each FHLBank has its own unique product offerings that it structures to provide access to the capital markets for community lenders that typically do not have their own direct access. Generally, advances may have fixed or floating rates, with maturities ranging from overnight to at least 20 years. Each advance is tailored to the needs of the member.
Short term advances provide short term liquidity to support members' cash management activities and to help members meet obligations as they come due. Longer term advances provide funding for longer term assets and interest rate risk management.
Nationally, what is the amount of outstanding advances?
As of September 30, 2012, the Federal Home Loan Banks held $412.3 billion in outstanding advances. The amount of advances grows and shrinks depending on the need for liquidity.