Two of the biggest banks to cryptocurrency companies are rushing to stem a flood of customer withdrawals by borrowing billions of dollars from Federal Home Loan Banks, the system originally designed to support mortgage lending in the 1930s.
Signature Bank tapped its local home-loan bank for nearly $10 billion in the fourth quarter, among the largest such borrowings by any bank since early 2020, according to securities filings. Silvergate Capital Corp., a competing lender that shifted its business toward crypto a decade ago, received at least $3.6 billion.
The borrowings at Signature—a commercial bank mostly known for multifamily real-estate lending before hitching onto the crypto craze—are more than double its previous highest sum in several years. Silvergate, meanwhile, didn’t have any home-loan bank borrowings a year earlier.
The $1.1 trillion home-loan bank system provides low-cost funding to its more than 6,500 members, which include commercial lenders, thrifts, credit unions and insurers. Comprising 11 government-chartered cooperatives, Federal Home Loan Banks, also known as FHLBs, were founded to help support housing finance during the Great Depression. Now they funnel cash into the banking system, using their implicit government backing to borrow money cheaply.
Although helping banks shore up liquidity is part of the mission of FHLBs, some observers say backstopping the crypto industry’s fallout is far removed from the original intent.
The banks began hemorrhaging deposits last year when crypto prices collapsed and FTX, one of the industry’s largest exchanges, filed for bankruptcy. The two were among a small subset of banks that vacuumed up deposits from crypto companies when the industry was booming and many other banks shunned their business.
Deposits declined at Signature in 2022 for the first time in its two-decade history, dropping below $89 billion from nearly $103 billion at the start of the year. Silvergate raced to cover $8.1 billion in withdrawals, selling assets at a steep discount and leading to a fourth-quarter loss of more than $1 billion. Shares of Signature and Silvergate are down around 60% and 85%, respectively, over the past year.
Traditional finance has remained insulated from crypto contagion thus far, though FHLB lending to crypto-exposed banks threatens to amplify that risk. Home-loan bank advances are superior to all other debt, meaning that in the event of a member bank’s bankruptcy, an FHLB bank would be first in the collection pecking order, even ahead of the Federal Deposit Insurance Corp.
“If you tapped FHLB advances in a big way, you’re going to have to explain why that was more attractive than organically going out to new or existing customers,” said Brett Rabatin, head of equity research at Hovde Group. “The pressure and need for funding will only increase—I expect bank borrowings from FHLBs will continue to grow over the coming quarters.”
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