Your Best Funding Option May Not Be a Deposit Campaign
By Michael Hunker, director, Darling Consulting Group
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Recent headlines have spotlighted the sharp increase in Federal Home Loan Bank borrowing, with advances rising 20% during the first half of 2026, from $676.7 billion to $810.7 billion.
However, that increase deserves context.
Much of that attention-getting growth was concentrated among larger FHLBank members, rather than reflecting a broad-based increase in borrowing across the industry. By contrast, credit union advances declined nearly 4% during the first half of the year, while community bank advances were essentially flat, increasing just 1.7%, based on the first and second quarter FDIC industry profiles.
In other words, higher advance balances are not necessarily a sign of funding stress. For many institutions, FHLB advances are simply another tool for managing liquidity, funding growth, and controlling marginal funding costs. Used appropriately, they can be an effective complement to a strong deposit franchise.
Key insight: The more useful question is not whether institutions should borrow from the FHLB system, but when advances make economic sense and how they should fit within their broader funding strategy.
Need to Know:
- FHLB advances are designed to reliably and efficiently bridge funding gaps created by loan growth or deposit volatility.
- Advances may help control marginal funding costs and support margin management when deposit repricing would affect a much larger balance base.
- The right comparison is typically the marginal cost of retaining or acquiring deposits, not the institution’s average deposit cost.
- FHLB advances offer flexibility in term and structure, giving the asset-liability committee (ALCO) more control over the liability profile.
- Advances may work best as part of a diversified funding strategy alongside a healthy deposit franchise.
Why it matters: The decision on whether to borrow or to reprice deposits can have meaningful implications for earnings, liquidity and risk. The right answer depends on the economics of each funding source and how it fits within the broader strategy.
With that context in mind, the case for FHLB advances comes down to a few clear benefits and tradeoffs.
The Pros for Using FHLB Advances
1. Reliable access to liquidity: FHLB advances can provide members with a dependable source of wholesale funding that can be accessed quickly when deposit growth slows, loan demand increases, or other liquidity needs arise.
Some FHL Banks offer same-day funding up to the available borrowing line, making advances particularly useful for managing timing differences and as part of a contingency liquidity plan.
2. Potentially competitive marginal funding: Deposit promotions can look cheaper than wholesale funding based on the posted rate alone. However, the true marginal cost can be higher once balance migration is included.
Here’s an example: A 3.00% promotional deposit that attracts 50% new money and 50% balances migrated from an existing 1.00% product has a marginal cost of roughly 5.00% on the new money raised. If a comparable FHLB advance were priced at 4.00% to 4.25%, the advance may actually be the lower-cost source of incremental funding.
The exact outcome depends on migration and new-money capture. But the larger point is that advances provide a known marginal cost that can be compared directly against the full economics of a deposit campaign.
3. Funding and asset-liability management flexibility: FHLBs offer a wide range of structures, including fixed and floating rates, overnight through long-term maturities, amortizing advances, and options such as callable and putable advances.
That flexibility gives ALCO more control over the liability structure and allows funding to be matched more purposefully to asset cash flows and interest rate exposure.
Key insight: Deposits do not always arrive in the amount or maturity structure an institution wants, so advances can help fill those gaps with more precision.
Read more: What Really Is a Core Deposit Now? Customer Behavior Is Your Best Guide
The Cons Against Using FHLB Advances
1. Greater reliance on advances requires thoughtful contingency planning: FHLB advances are designed to be a stable source of liquidity under normal operating conditions.
However, like any external funding source, access depends on the institution’s financial condition, collateral quality and available borrowing capacity. The Federal Housing Finance Agency, the home loan bank regulator, has emphasized that the FHLB System is not intended to serve as the lender of last resort for troubled institutions. As usage grows, management should monitor funding concentration, maturity concentrations, and the availability of alternative liquidity sources.
2. Collateral requires active management: Advances must be secured with qualifying loans or investments that are subject to FHLB haircuts. Changes in rates and collateral values can reduce borrowing capacity, and asset cash flows may slow at the same time liquidity needs increase. Haircuts can also change as economic conditions evolve.
Just as important, institutions should understand what collateral is currently supporting borrowing capacity and what additional steps may be required to make more collateral available. The practical takeaway is to maintain enough pledged collateral and available capacity before the funding is needed.
Read more: How to Get More Deposits at Lower Costs? Give Marketing Room to Run
Strategic Takeaways for Tapping FHLB Advances
A good FHLB strategy starts with a clear view of total available liquidity. Management should evaluate on-balance-sheet liquidity alongside available FHLB capacity, Federal Reserve capacity, brokered funding, and other contingent sources, including how quickly each source can actually be accessed.
From there, ask what role the advance is intended to play:
1. Bridge temporary deposit volatility. Short-term advances may cover timing differences without triggering a permanent deposit pricing decision.
2. Fund profitable growth. Wholesale funding may support attractive loan growth when deposits are not keeping pace, but the economics should account for all costs associated with the loan, not just the funding rate.
3. Compare marginal funding costs. Evaluate the full cost of a deposit promotion, including balance migration and cannibalization, against advance pricing, rather than comparing posted rates alone.
4. Manage maturity and interest rate risk. Choose advance terms and structures that fit the existing rate exposure and expected asset cash flows. The right structure may help address both a funding need and an ALM objective.
5. Maintain borrowing capacity. Pledge enough eligible collateral to support expected borrowing needs and understand the impact of haircuts and collateral values before the liquidity is needed.
Key insight:The objective should not be to minimize FHLB borrowing, and it should not be to maximize usage either. The objective is to understand what each incremental dollar of funding costs, what flexibility it provides, and how it changes the balance sheet.
FHLB advances can be an effective tool for managing liquidity, supporting growth, and improving funding flexibility. Used deliberately, they can play an important role within a broader funding strategy.
Read next: How SoFi Powers Its Relentless Loan Origination Machine
Disclaimers:
This article is provided for general informational purposes only and is not intended to constitute financial, investment, legal, or other professional advice. Any examples are illustrative only, and actual results may vary. The appropriateness, availability, costs, benefits, and effectiveness of any funding source or strategy will depend on an institution’s particular circumstances, financial condition, liquidity position, collateral and borrowing capacity, market conditions, and other factors. Nothing in this article is intended to guarantee the availability, cost, performance, or outcome of any particular funding source or strategy.
