Borrowing from Federal Home Loan banks jumped 20% in 2Q

• Key insight: Banks have turned to the Federal Home Loan banks for liquidity because the rise in long-term Treasury yields has sparked fierce competition for deposits.
• Supporting data: Commercial banks accounted for roughly 90% of the $134 billion increase in Federal Home Loan bank advances during the first six months of the year. 
• Expert quote: "The increase in advances reflects the system acting as designed — to provide reliable access to liquidity across the economic cycle, when members need it." —Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks

Commercial banks tapped the Federal Home Loan Bank System for more funding in the second quarter as financial institutions navigated an increasingly competitive deposit market and a persistent "higher-for-longer" interest rate environment.  

Advances across the Federal Home Loan Bank System rose 20% in the second quarter to $810.7 billion, up from $676.7 billion at year-end 2025. The shift was primarily driven by commercial banks, which accounted for roughly 90% of the $134 billion increase in advances during the first six months of the year. 

The ramp-up in borrowing reflects changing market dynamics. With long-term Treasury yields breaking above 5%, depositors have migrated out of traditional banks to higher-yielding money-market funds. Commercial banks turned to the Federal Home Loan banks to replace deposits and maintain liquidity without radically repricing their broader deposit base.

"The increase in advances reflects the system acting as designed — to provide reliable access to liquidity when members need it across the economic cycle and including a rising rate environment," said Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, the system's trade group.

The current yields for long-term U.S. government debt have reached their highest thresholds in nearly two decades, driven by federal debt recently passing the $40 trillion milestone, massive AI investments and shifting monetary policy expectations.

The benchmark 10-year Treasury yield hit 5.04% on Sept. 15, 2026 — the highest level recorded since July 2007. The 30-year Treasury bond yield also peaked recently at 5.36%, a nearly 20-year high. This movement reflects a shift from the end of 2025, when the 30-year yield stood at 4.8%.

The 10-year yield, which fell slightly to 4.96% on Wednesday following the Federal Reserve's announcement of a 25-basis-point rate hike, is widely considered a key reference rate for the broader economy, used to price residential mortgages, auto financing and personal loans. Interest rates have been exceptionally low for most of the last quarter-century, but levels near 5% represent a return to more traditional market conditions.  

Amid rising Treasury yields in late August, the number of banks marketing rates above 3.5% on one-year CDs jumped dramatically, according to data from S&P Global Market Intelligence.

When Treasury rates go up, big institutions shift their money into money-market funds and other investment vehicles that provide a higher rate of return. And when banks experience deposit outflows, they tap the Home Loans banks to shore up their liquidity.

Conversely, when interest rates are low, the need for liquidity drops because banks are not paying much for deposits. 

"Intuitively, when money market funds offer yields substantially higher than deposit rates, cash investors have a stronger motivation to shift funds from bank deposits into MMFs," researchers at the Fed wrote in a November note.

Borrowing from the Home Loan banks remained heavily concentrated among larger institutions. The Federal Home Loan Bank of New York, which supplies liquidity to Wall Street banks, saw the largest increase in borrowing during the first half of the year, up 38% to $127.7 billion. Advances from the Federal Home Loan Bank of Cincinnati rose 34% to $93.9 billion. Home Loan bank advances are fully collateralized, with total collateral value exceeding total outstanding borrowing.

In addition to commercial banks, advances to insurance companies also expanded — growing from $177 billion at the start of the year to $202 billion by June 30 — while advances to credit unions and savings institutions contracted slightly. 

In addition, mortgage loans held in banks' portfolios rose 5% to $83 billion on June 30. The system reported its second-quarter financial results in July.

The Federal Home Loan Bank System consists of 11 federally chartered banks that support liquidity by making loans to roughly 6,300 member institutions. A report from the Government Accountability Office last year found that the system serves as a reliable and consistent source of funding for banks of all sizes.

Despite the jump in lending volume, overall Federal Home Loan Bank System net income for the second quarter fell 1% to $1.4 billion from a year earlier, due to lower net interest income.