Regional banks in the United States increased their reliance on advances from the Federal Home Loan Bank (FHLB) system in the fourth quarter of 2025, a trend coinciding with guidance from the Federal Reserve encouraging banks to utilize these facilities for liquidity management. This activity suggests a continued, if cautious, response to the stresses revealed in the banking sector in 2023 and a potential shift in how regional banks approach liquidity buffers.
Data available indicates that Old National Bancorp saw a 10.1% increase in its borrowings from the FHLB, reaching $6.2 billion. While specific figures for other institutions weren’t immediately available, the overall trend points to increased usage of the FHLB system. This uptick occurs despite the Fed’s efforts to steer banks toward the discount window as a primary source of liquidity, a facility that carries a different set of implications for a bank’s perceived financial health.
The FHLBs are government-sponsored enterprises created to provide liquidity to member banks, particularly community banks and those focused on housing finance. Advances from the FHLB are secured by eligible collateral and generally carry interest rates tied to market benchmarks. The discount window, conversely, is a direct lending facility offered by the Federal Reserve to depository institutions. Borrowing from the discount window can sometimes be viewed negatively by markets, signaling potential financial strain, whereas FHLB advances are often seen as a more routine liquidity management tool.
The Fed’s recent messaging, communicated to bank examiners, aimed to reduce the stigma associated with utilizing the discount window. Examiners were instructed not to discourage banks from accessing this facility for liquidity needs. This policy shift was intended to ensure banks feel comfortable addressing short-term funding pressures without fear of regulatory repercussions. However, the simultaneous increase in FHLB borrowings suggests that some banks may still prefer the perceived safety and discretion of the FHLB system.
Several factors likely contribute to this preference. The FHLB system offers a relatively anonymous source of funding, avoiding the potential market signaling that could accompany discount window borrowing. The structure of the FHLB system, with its cooperative ownership model, may foster a greater sense of comfort among regional banks. Banks are members of their regional FHLB and have a stake in its operations.
The increased reliance on FHLB advances also raises questions about the effectiveness of the Fed’s efforts to promote the discount window. While the messaging change was a positive step, it appears insufficient to fully overcome the existing perceptions surrounding the facility. Banks may be weighing the potential reputational risks of discount window borrowing against the costs and benefits of FHLB advances.
The broader economic context also plays a role. The fourth quarter of 2025 saw continued uncertainty surrounding interest rate policy and economic growth. These conditions may have prompted banks to bolster their liquidity positions as a precautionary measure, leading to increased demand for FHLB advances. The fact that borrowing increased *despite* the Fed’s encouragement of the discount window suggests a heightened level of caution within the regional banking sector.
Looking ahead, the trend in FHLB borrowings will be a key indicator to watch. A sustained increase could signal underlying vulnerabilities within the regional banking system, while a decline would suggest that banks are becoming more comfortable utilizing the discount window and managing their liquidity independently. The recent activity underscores the ongoing need for careful monitoring of the financial health of regional banks and the effectiveness of the Fed’s liquidity facilities.
The situation is further complicated by recent developments in the broader financial landscape. The first instance of Secured Overnight Financing Rate (SOFR) trades occurring below zero, as reported recently, indicates a shift in short-term interest rate dynamics that could impact bank funding costs and liquidity management strategies. While the direct impact of negative SOFR rates on FHLB advances remains to be seen, it adds another layer of complexity to the current environment.
concerns remain regarding the potential impact of economic shocks – such as a resurgence of COVID-19 – on the stability of US insurers and their holdings of exotic Collateralized Loan Obligations (CLOs). While not directly related to regional bank borrowing, systemic risk within the financial system can have cascading effects, potentially influencing liquidity conditions and prompting increased reliance on facilities like the FHLB.
Finally, the recent approval allowing American Express to become a category III bank could have implications for the competitive landscape and funding strategies within the financial sector, though the immediate effects on regional bank borrowing are unclear. The evolving regulatory environment and market conditions will continue to shape the liquidity management practices of regional banks in the coming months.
