The use of the Federal Home Loan Bank’s funds to offset crypto losses has raised questions about the banks’ reliance on the government’s liquidity system.
La Jolla, Calif.-based Silvergate Bank and New York-based Signature Bank, arguably the two traditional banks with the most exposure to the digital asset industry, have both tapped Home Loan Bank forward after the fall of the cryptocurrency exchange FTX.
Of the two, Silvergate, which has shifted most of its activity toward digital assets over the past decade, was more affected by the crisis during the FTX crash. The bank received it $4.3 billion ahead from the Federal Home Loan Bank of San Francisco in the fourth quarter of 2022 to increase $8.1 billion in savings. These profits make up more than 60 percent of Silvergate’s sales revenue.
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The event provides an overview of both the supervision of crypto activities in the banking sector and the use of funds to support organizations that have little to support housing.
“The fact that this bank, which was exposed to crypto losses, was attached to the Federal Home Loan Bank, that was the first suggestion that the real system could be connected with crypto in some way,” David Zaring, a legal research professor. at the University of Pennsylvania’s Wharton School of Business, said. “It’s related to … a hidden way for banks to satisfy their financial needs, in my view, it’s a bit worrying.”
At the heart of the debate is whether the Federal Home Loan Bank of San Francisco, in giving money up front to Silvergate, was merely adhering to its mandate to provide liquidity to a member bank, or the provision of real life savings to a company that is working. at risk and business validation.
The move is expected to be the first mover for commercial banks, said Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, a four organization to be the voice for the Federal Home Loan Bank System. As long as a company can provide adequate assets as collateral, the Home Loan Bank should provide funds, said Donovan.
“Home Loan Banks is not an emergency that provides liquidity. There is the idea that if an organization needs financing that is in a crisis situation, but problems can arise for many reasons in the normal course of business,” he said. “Congress established us to meet the needs of banks in those circumstances.”
In fact, cash advances are usually the first thing that many banks will turn to for cleaning up a pin. In the latest news of the Fed research by senior financial officersIn results released last week, more than three-quarters of Housing Bank members said they would “seems” to tap forward when their funds fall below the required level. Housing Bank loans are the most sought after loans in question.
There are many reasons why banks are interested in advances, Zaring said, including their prices relative to other financing options as well as the lack of attention from business analysts, investors money and generation about use. Now, turning to other places, such as the Fed’s discount window, looks worse, he said.
Julie Hill, a law professor at the University of Alabama who specializes in financial law, said that regulators are aware of this need for progress and should sign off on their inclusion in financial planning. a bank. He said, this seems to be the case between Silvergate and its regulator, the Fed.
“The Federal Reserve was well aware prior to FTX that crypto presented very high risk, Silvergate was well aware of that, and that’s part of what made it so different. their balance sheets than a typical community bank of the same size,” Hill said. “You know Silvergate had a financing plan, you know part of that plan was securities and I would be very surprised if the borrowing from places like the Federal Home Loan Bank was San Francisco is not part of that financial plan.”
Silvergate and the Fed Board of Governors declined to comment for this article.
Hill said there’s an argument to be made that regulators did the right thing by allowing Silvergate to back on Home Loan Bank going forward because the bank was able to face the run and avoid failure. On the other hand, he sees concerns that the use of surplus funds to stop the run is not effective enough to create more problems for the Bank. the Federal Deposit Insurance Corp.
The 11 Federal Home Loan Banks were created as government-sponsored enterprises through an act of Congress, but are privately owned by member banks, credit unions, mutual funds and other financial institutions. They enjoy special benefits, such as special tax treatment and audit fees. It is also given first priority, which means that they are repaid first in case of bank failures. This means that the FDIC could be on the hook for a future bank failure.
According to Zaring, this situation is worrisome because the Home Loan Bank’s motivation to support their members may conflict with general financial considerations.
“The Fed sits on (the Financial Security Oversight Council), the Home Loan Banks don’t, so the Fed has a financial stability mandate that’s important when you think about contagion and bailout banks. in terms of financing,” he said. . “It’s not at all clear that the Federal Home Loan Bank Board has that kind of perspective on what’s going on in the financial community.”
Donovan said that in the case of Silvergate, as with all developments, the bankers – in this case the Fed and the FDIC – could have stopped the liquidation if the bank feels that it poses a threat to financial stability.
“In the case of Silvergate and others, the FDIC, the Fed and the state banks are still in contact with the Housing Banks,” he said. “If they have safety and soundness concerns about a bank, they can ask not to make the first payment.”
Hill said the incident shows how regulators have taken a trial-and-error approach to managing the risks posed by crypto companies.
“It’s not like regulations mandate all banks or thousands of them to do this,” Hill said. “Regulators are allowing a small group of banks to experiment with this space and they may be rethinking what kind of experiment they allow.”
Alison Hashmall, a banking and regulatory attorney with the law firm Debevoise & Plimpton, said she expects the Fed to take a tougher approach with banks trying to do business with crypto companies going forward. He pointed at her joint book from the Fed, FDIC and the Comptroller General of the Treasury issued earlier this month, in which regulators approved a prudent approach to oversee the exposure of digital assets.
“Bank executives advise that, in order to pursue a safe and sound system, you must think carefully and think about how much of your savings you will get from these type of company (crypto),” he said. “Investigators are going to look at that and they want the banks to make sure they’re not exposed.
Founded in 1988 as a commercial lending company, Silvergate began as a real estate brokerage before branching out into a mortgage broker. of a single family then many families are financed. In 2013, he started building his digital asset business. Today, most of the bank’s business is focused on providing payments, loans and financing services to crypto companies. Most of this is done on the Silvergate Exchange Network platform.
Meanwhile, Silvergate’s involvement in the mortgage industry has declined. At the end of last year, it abandoned its mortgage product, due to the rise in interest rates and the decline in the number of mortgages.
The fact that Home Loan Bank funds are being used to support banks that have little access to housing finance has troubled some housing advocates. While the Federal Housing Finance Agency, which oversees the Housing Bank, is conducting a comprehensive review of the system, some require stricter conditions to encourage banks to focus on their core mandate.
Caroline Nagy, senior policy adviser for housing, energy companies and justice and America for Financial Reform, said that the Housing Loan Bank will provide financial assistance for banks, the government must ensure that the activities that lead to the construction of more houses.
“If we think that the introduction of funds for large banks and insurance companies in the country is a proper use of public resources, and I am talking specifically about the special level of debt and the free level of taxation the system, we should see a general benefit,” said Nagy. “In fact, we have great needs for the kind of investment that this banking system can produce. We really need affordable housing. We are in an affordable housing crisis.”
The FHFA declined to comment for this story.
While some see Silvergate’s financing process as a misuse of Home Loan Bank’s system, Signature’s use of financing is superior. then get used to it.
One of New York’s leading multifamily lenders, Signature Home Loan Bank of New York often closes for expenses to support the move, taking in $11.3 billion in profits during the quarter. fourth in 2022. digital payment system, its deficit – which was $88.6 billion on December 31, from $106.1 billion a year earlier – was the result of effective efforts by pull back from the digital asset space.
“We’re really the epitome of what the Federal Home Loan bank is all about because any loan we’re getting from the FHLB is backing our loans to a lot of families,” Eric R Howell, Superintendent of Records, tell American Banker. “It’s really part of our overall financing mix. We use these expenses to fund our business.”