After Client Withdrawals Rise, Signature and Silvergate Resort to Government-Chartered Lenders
Two of the biggest banks for cryptocurrency companies are borrowing billions of dollars from Federal Home Loan Banks, a system that was created in the 1930s to help with mortgage lending, to stop a flood of customer withdrawals.
Reports show that Signature Bank borrowed about $10 billion from its local home-loan bank in the fourth quarter. This was one of the largest loans made by a bank since the start of 2020.
At least $3.6 billion was given to a competing lender, Silvergate Capital. It was about ten years ago when the business change its focus to cryptocurrencies.
Signature is a commercial bank that was mostly known for financing multifamily real estate before the crypto craze.
In the last few years, it has borrowed more than twice as much as it did at its previous peak. A year ago, there were no home loans from banks in Silvergate.
More than 6,500 members at Silvergate have access to low-cost loans that are offered through the home-loan bank system. The total amount allocated to the loaning program is $1,100 billion.
The members that can benefit from the loaning program include insurance, credit unions, thrifts, and commercial lenders.
Federal Home Loan Banks, or FHLBs, are made up of eleven government-chartered cooperatives that were set up during the Great Depression to help people get loans for homes.
Now, they are putting money into the banking system, and they are counting on the implicit support of the government so that they can borrow money at low-interest rates.
Even though one of the FHLBs’ jobs is to help banks improve their liquidity. Some people in the industry believe that the FHLBs should not have to pay for the problems caused by the cryptocurrency business.
These people believe that the cryptocurrency business should be responsible for paying for its own problems.
Senator Elizabeth Warren issued a statement on the matter. She stated that it was the main reason she had been warning the world and especially the banking institutions of cryptocurrencies.
She did not wanted these sectors to be intertwined in the first place. She made it clear that they have to do whatever they can to ensure that the taxpayers do not end up with something that is nothing but losses.
She called the cryptocurrency industry to be nothing less than illicit finance that harbors, money laundering, and fraudulent transactions.
Last year, when the value of cryptocurrencies dropped and FTX, one of the top exchanges in the industry, went bankrupt, banks started bleeding money.
During the peak of the crypto industry, when most banks did not want to do business with crypto businesses, these two banks took deposits from crypto businesses.
The Banks Started Losing Money
For the first time in Signature’s 20-year history, deposits went down in 2022, going from about $103 billion at the beginning of the year to less than $89 billion.
Silvergate had to sell assets at a big discount to cover withdrawals of $8.1 billion, which led to a loss of more than $1 billion in the fourth quarter.
In the last year, investors lost about 65% and 85% of what they put into Signature and Silvergate, respectively.
Signature’s chief operating officer, Eric Howell, said that the bank’s increased borrowings are “pretty low historically for banks.” Especially, since the Federal Reserve’s tightening has made liquidity less available.
Silvergate would not say anything. In spite of the recent changes, the financial institution has taken a new approach by putting more emphasis on its commitment to the cryptocurrency business.
Banking Industry Short on Cash, Seeking Alternative Funding
Not just cryptocurrency banks need cash quickly. Traditional banks struggle to keep customers interested in higher-yielding Treasury and money-market accounts.
Borrowing from home-loan banks rose to $661 billion in the third quarter of 2018, the most recent period for which data is available.
This is up from $344 billion in the third quarter of 2017 and close to a recent high of over $800 billion in the first quarter of 2020.
According to the Federal Reserve Bank of New York, cash holdings at small banks (those with less than $3 billion in assets) dropped to 6% of total assets. It happened during the first three quarters of 2022.
This was down from more than 13% just nine months earlier.