Cryptocurrencies borrow billions from home loan banks to fill shortfalls

Two of the biggest cryptocurrency company banks are rushing to stem a wave of customer drawdowns by borrowing billions of dollars from federal home loan banks, the system originally designed to support mortgage lending in the 1930s.

Signature Bank SBNY,
+7.47%
it leveraged its local home loan bank for nearly $10 billion in the fourth quarter, among the largest such loans by any bank since the beginning of 2020, according to securities filings. Silvergate Capital YES,
+13.00%
a competing lender that shifted its business to cryptocurrencies a decade ago received at least $3.6 billion.

Loans from Signature, a commercial bank best known for multi-family home loans before jumping into the cryptocurrency craze, are more than double their previous highest sum in several years. Silvergate, meanwhile, had no bank loan for its home a year earlier.

The $1.1 trillion home loan banking system provides low-cost financing to its more than 6,500 members, which include commercial lenders, savings funds, credit unions and insurers. Made up of 11 government-managed cooperatives, the Federal Home Loan Banks, also known as FHLBs, were founded to help shore up housing financing during the Great Depression. Now they funnel money into the banking system, using their implicit government support to borrow money cheaply.

While helping banks bolster liquidity is part of the FHLB’s mission, some observers say bolstering the fallout of the cryptocurrency industry is far from the original intent.

“This is why I have warned of the dangers of allowing cryptocurrencies to become intertwined with the banking system,” said Senator Elizabeth Warren (D., Mass.). “Under no circumstances should taxpayers be left pocketed by crashes in the cryptocurrency industry, a market rife with fraud, money laundering and illicit finance.”

Banks started hemorrhaging deposits last year when cryptocurrency prices plummeted and FTX, one of the industry’s largest exchanges, filed for bankruptcy. The two were among a small subset of banks that sucked deposits from crypto firms when the industry was booming and many other banks shunned their business.

Deposits declined at signing in 2022 for the first time in its two-decade history, falling 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 about 60% and 85%, respectively, over the past year.

Eric Howell, chief operating officer at Signature, said the bank’s largest lending is “pretty low historically for banks,” especially as the Federal Reserve’s tightening has dried up liquidity.

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

Cryptocurrencies aren’t the only ones in need of quick cash. Home loan bank loans rose to $661 billion in the third quarter of last year, the latest period for which data is available, up from $344 billion a year earlier and nearing a recent peak nearly $800 billion in the first quarter of 2020.

Traditional banks are struggling to keep customers who have been enticed by high-yield Treasury and money market accounts. During the first three quarters of 2022, cash balances at small banks, or those with assets under $3 billion, 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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