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Crypto banks borrow billions from home-loan banks to plug shortfalls

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
  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.

“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. 

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.

Silvergate declined to comment. The bank has taken a different approach, emphasizing its commitment to the crypto industry despite the recent turmoil.

Crypto banks aren’t the only ones in need of quick cash. Borrowing from home-loan banks surged to $661 billion in the third quarter last year, the latest period for which data are available, up from $344 billion a year earlier and approaching a recent peak of nearly $800 billion in the first quarter of 2020.

Traditional banks are struggling to retain customers who have been enticed by higher-yielding Treasurys and money-market accounts. Through the first three quarters of 2022, cash balances at small banks, or those with less than $3 billion in assets, fell to 6% of total assets, down from more than 13% just nine months earlier, according to the Federal Reserve Bank of New York. 

An expanded version of this story appears on WSJ.com.

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