WASHINGTON - The rising dependence of community banks on Federal Home Loan Bank System advances is putting the deposit insurance funds at risk, according to an article published by the Federal Reserve Bank of St. Louis.
The article, which was carried in the October issue of the bank's Regional Economist magazine, argued that because there are no risk premiums on the advances and because the Home Loan banks can collect collateral ahead of depositors in the event of a bank failure, the insurance funds could be liable to significant losses.
"Should a community bank fail, the FHLB would be in line before" the Federal Deposit Insurance Corp., three St. Louis Fed economists wrote. "All other things equal, fewer losses for the FHLB System imply greater losses for the FDIC."
An FDIC official said the agency is looking at the problem but is not overly concerned.