Is Federal Home Loan Bank Funding A Risky Business For The FDIC?

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Letter Writer:

Aaron Freed, a risk analyst in the banking industry in Cincinnati, Ohio

Date Posted:

Nov. 30, 2011

Letter:

"In short, access to FHLB funding enables community banks to take risk without paying a price. And an increase in risk today makes it more likely that the FDIC will have to close the bank tomorrow." The price they are paying whether they are relatively a greater or smaller risk is that they have to pledge collateral that cannot be used in other ways. Albeit, I liked the points about the disconnect between risk and reward that have become integrated into the financial system due to the FHLB. It's an unintended consequence of trying to lend to good credit when there's no money left. Perhaps, we need to pare down the leverage some more. Almost 12 years later and this article still has serious value for policy discussion.