The Impact of Federal Home Loan Bank (FHLB) Advances on Small Business Lending by Community Banks—2010–2016
-
Elijah Brewer
and
Thomas S. Mondschean
Abstract
In this paper, we examine the relationship between small business loan growth and growth in core deposits and Federal Home Loan Banks (FHLBs) advances from 2010 to 2016. Controlling for other effects, we find that the relationships between small business loan growth is positively and significantly related to both FHLB advance growth and core deposit growth, with the coefficient on advance growth being significantly larger than the coefficient on core deposits over the entire sample period. We also tested whether this relationship changed after 2014:3 reflecting the Federal Reserve’s relaxation of the regulatory burden on smaller banks. We find that the relationship between loan growth and core deposit growth became more positive after the change, but the relationship between loan growth and FHLB advance growth did not. As a result, we could no longer reject the hypothesis that the coefficient on core deposit growth was equal to the coefficient on FHLB advance growth after 2014:3. This provides some empirical support that the regulatory changes in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA) influenced small business lending by strengthening the impact of the growth in core deposits on the growth of small business lending, complementing the work of Bordo and Duca (2018) that changes in DFA had some unintended negative consequences for lending to small businesses. It also suggests that lowering the regulatory burden faced by community banks (which have a larger proportion of core deposits to total assets than non-community banks) could improve the incentive to increase small business lending. It also implies that FHLB advances remain an important funding tool at the margin to give commercial banking organizations greater liquidity and flexibility in funding their balance sheets.
Acknowledgments
We thank the editor (Dr. Chandra Mishra) and reviewers for many helpful comments that greatly improved the quality of the paper. We also thank the participants at our 2018 Western Economic Association conference presentation for their comments on an earlier version of this paper. In addition, Dr. Mondschean gratefully acknowledges research support from the Driehaus College of Business at DePaul University and research assistance from Natalie Franz. The views expressed here are those of the authors and do not represent the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Chicago.
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Articles in the same Issue
- Frontmatter
- Competitive Research Articles
- Opportunity Recognition: Conversational Foundations and Pathways Ahead
- The Mechanism of Entrepreneurs’ Social Networks on Innovative Startups’ Innovation Performance Considering the Moderating Effect of the Entrepreneurial Competence and Motivation
- The Impact of Federal Home Loan Bank (FHLB) Advances on Small Business Lending by Community Banks—2010–2016
- Learning, Dynamic Capabilities, and Firm Performance: The Case of Entrepreneurial Firms in the South Korean Fashion Industry
- Uncovering the Cultural Beliefs in a Nascent Entrepreneurial Ecosystem
- Director Network, Governance of Independent Directors and Efficiency of Enterprise Capital Allocation
Articles in the same Issue
- Frontmatter
- Competitive Research Articles
- Opportunity Recognition: Conversational Foundations and Pathways Ahead
- The Mechanism of Entrepreneurs’ Social Networks on Innovative Startups’ Innovation Performance Considering the Moderating Effect of the Entrepreneurial Competence and Motivation
- The Impact of Federal Home Loan Bank (FHLB) Advances on Small Business Lending by Community Banks—2010–2016
- Learning, Dynamic Capabilities, and Firm Performance: The Case of Entrepreneurial Firms in the South Korean Fashion Industry
- Uncovering the Cultural Beliefs in a Nascent Entrepreneurial Ecosystem
- Director Network, Governance of Independent Directors and Efficiency of Enterprise Capital Allocation
