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FRM Part II · FRM Exam Part II · Managing Nondeposit Liabilities

A US community bank is considering Federal Home Loan Bank (FHLB) advances as a replacement for part of its brokered deposits. Which feature of FHLB advances is most relevant to the bank's liquidity risk assessment?

FHLB advances are collateralized loans, so a bank's borrowing capacity depends on the amount and quality of eligible assets it has pledged, after haircuts. This makes collateral management central to assessing the liquidity this source can actually provide.

  1. AThey are unsecured and priced off the bank's own credit spread
  2. BThey are collateralized, so borrowing capacity depends on the amount and quality of pledged assets after haircutsCorrect
  3. CThey carry no early repayment or renewal considerations because the FHLB guarantees rollover
  4. DThey can be drawn only by banks that have first exhausted the central bank discount window

Explanation

FHLB advances are secured lending to members. Capacity equals pledged collateral value after haircuts (lendable value), so collateral availability and quality determine how much can be drawn. They are not unsecured, rollover is not guaranteed, and there is no requirement to use the discount window first.

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