- The United States Federal Home Loan Banks System (FHLB) is lending billions of dollars to two of the largest cryptocurrency banks in an effort to mitigate the effects of a surge in withdrawals.
- Lawmakers are warning of the dangers of allowing crypto to become intertwined with the banking system.
- Silvergate Bank’s CEO has emphasized the bank’s commitment to the crypto industry despite the recent turmoil.
The United States Federal Home Loan Banks System (FHLB) is lending billions of dollars to two of the largest cryptocurrency banks, Signature Bank and Silvergate Capital Corp, to mitigate the effects of a surge in withdrawals. This news is causing some concerns among lawmakers, warning of the dangers of allowing crypto to become intertwined with the banking system.
The FHLB is a consortium of 11 regional banks across the United States that provide funds to other banks and lenders. Founded during the Great Depression to support housing finance, the system has $1.1 trillion in assets and over 6,500 members.
Signature Bank reportedly tapped its local home-loan bank for nearly $10 billion in the fourth quarter, among the most significant such borrowings by any bank since early 2020, according to securities filings. Silvergate, which shifted its business toward crypto a decade ago, received at least $3.6 billion.
These borrowings at Signature, a commercial bank mostly known for multifamily real-estate lending before hitching onto the crypto craze, are more than double their previous highest sum in several years. Silvergate didn’t have any home-loan bank borrowings a year earlier.
Lawmakers Express Concerns Over Crypto-Banking Intertwinement
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.
“This is why I’ve been warning of the dangers of allowing crypto to become intertwined with the banking system,” said Sen. Elizabeth Warren (D., Mass.). “Under no circumstance should taxpayers be left holding the bag for collapses in the crypto industry—a market brimming with fraud, money laundering, and illicit finance.”
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.
Signature and Silvergate Face Significant Losses
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.
Eric Howell, Signature’s chief operating officer, said the bank’s higher borrowings are “pretty low historically for banks,” especially as Federal Reserve tightening has drained liquidity. Signature has doubled its recent commitment to reducing crypto-linked deposits and said it has already begun paying down some of its borrowings.
The recent developments at Signature Bank and Silvergate Capital Corp highlight the ongoing challenges facing the crypto industry as it attempts to gain mainstream acceptance and become more closely intertwined with traditional finance. While the FHLB loans may provide a short-term solution for these banks, it remains to be seen whether this move will ultimately increase the risk for traditional finance and taxpayers.
