Is The Federal Home Loans Bank System Carrying Out a Stealth Rescue of the 2 Biggest Crypto Banks?

Signature Bank and Silvergate, two of the biggest crypto banks, have received billions in loans from the Federal Home Loan Banks, a system originally designed to support housing finance and community investment.

According to a Saturday report from The Wall Street Journal, Signature Bank received nearly $10 billion in loans from its local home-loan bank in the last quarter of 2022 while Silvergate received at least $3.6 billion.

Signature’s loans are more than double its previous highest sum in several years, while 2022 marked the first year for Silvergate to tap home-loan banks, the report said. 

The Federal Home Loan Banks are 11 US government-sponsored banks that provide loans to institutions. Founded during the Great Depression, the system has $1.1 trillion in assets and over 6,500 members and was originally designed to support housing finance and community investment. 

While FHLBs providing loans to other financial institutions is nothing out of the norm, some market participants have warned that lending to crypto-exposed banks could lead to the crypto contagion spreading to traditional finance companies too. 

Senator Elizabeth Warren, who has been a vocal critic of the crypto industry, has voiced concern regarding the growing relationship between crypto-exposed banks and TradFi companies. In comments to the WSJ, she said:

“This is why I’ve been warning of the dangers of allowing crypto to become intertwined with the banking system. 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.”

Signature Bank and Silvergate turned to home-loan banks last year following the collapse of cryptocurrency exchange FTX, which eroded user trust in the industry and led to a surge in withdrawals. 

As reported, Silvergate suffered a bank run following the collapse of FTX. Aside from taking loans, the crypto bank also had to sell $5.2 billion of debt securities it was holding on its balance sheet at a significant loss to cover around $8.1 billion in user withdrawals. As a result, it incurred a $718 million loss, which reportedly exceeds the bank’s total profits since 2013.

Furthermore, Silvergate had only $3.8 billion of deposits at the end of 2022, compared to $11.9 billion in 2021. Likewise, deposits at Signature dropped below $89 billion last year from nearly $103 billion at the start of 2022. 

The recent developments in the crypto market have also pushed some banks to exit the crypto space. Moonstone Bank, a digital bank focused on serving high-net-worth individuals, is one such bank, which has announced that it will be refocusing on the “community bank” role.