Are the Federal Home Loans Bank System and 2 of the Biggest Crypto Banks Performing a Stealth Rescue?
Signature Bank and Silvergate are two of the largest crypto banks. They have been awarded billions of dollars in loans by the Federal Home Loan Banks. This system was originally created to support community investment and housing finance.
According to Saturday Report According to The Wall Street Journal Signature Bank received almost $10 billion in loans from its local bank of home-loans in the third quarter 2022, while Silvergate received at most $3.6 billion.
Signature’s loans have more than doubled in recent years. Silvergate was the first to tap home-loan bank accounts in 2022, according to the report.
The Federal Home Loan Banks, 11 US-sponsored banks, provide loans to institutions. The Federal Home Loan Banks were established during the Great Depression. They have $1.1 trillion in assets, more than 6,500 members, and were originally created to support community investment and housing finance.
Although lending to FHLBs to other financial institutions is not unusual, market participants warn that lending to crypto-exposed bank could spread the crypto contagion to traditional finance firms.
Senator Elizabeth Warren has been vocal in her criticism of the crypto industry and has expressed concern about the growing relationship between crypto exposed banks and TradFi businesses. She said in comments to the WSJ:
“This is why I have been warning about the dangers of crypto becoming intertwined in the banking system. Taxpayers should not be held responsible for the collapse of the crypto industry, which is brimming over fraud, money laundering, and illicit finance.
Silvergate and Signature Bank switched to home-loan banking last year after the collapse of cryptocurrency exchange FTX. This eroded user confidence in the industry and caused a surge in withdrawals.
Silvergate was the victim of a bank ran following the collapse FTX, as reported by Reuters. To cover $8.1 billion in user withdrawals, the crypto bank had to also take loans and sell $5.2 billion worth of debt securities. According to reports, the bank suffered a $718million loss. This is more than its total profits since 2013.
Silvergate had $3.8 billion of deposits as of 2022, down from $11.9 billion in 2021. Signature’s deposits fell to $89 billion last year, from $103 billion at its peak at the beginning of 2022.
Some banks have decided to leave the crypto market due to recent developments in crypto. Moonstone Bank, a digital banking company that focuses on high-net-worth customers, has announced it will refocus on its “community bank” role.