The Fed Has the Discount Window, But the FHLBs Have Discounts

FHLB borrowing pays dividends. Literally.

A new note out with Susan McLaughlin & Andrew Metrick looks at FHLBs’ lending pricing—through a combination of sparse public data and the FHLBs’ own marketing materials—and why they’re always beating out the Fed’s discount window.

The recent FHFA report expressed interest in reforming the FHLBs to get them out of the “lender of next-to-last resort” position that adds stigma to the discount window and complicates the Fed’s job. But the report falls short of examining the pricing of FHLB advances. The FHLBs—GSEs that reap public benefits—pay dividends to banks based on how much and how often they borrow from the FHLBs. That's not an incentive the Fed's discount window can compete with.

Read the article here: https://som.yale.edu/story/2024/fhlb-dividends-low-hanging-fruit-reconfiguring-fhlb-lending