Crypto banks are borrowing billions from home loan banks to fill the gaps

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Two of the biggest banks in cryptocurrency companies are racing to stem a flood of customer withdrawals by borrowing billions of dollars from the Federal Home Loan Banks, the system originally designed to support mortgage lending in the 1930s.

Signature Bank SBNY, +7.47%, tapped its local home loan bank for nearly $10 billion in the fourth quarter, among the largest such borrowings by a bank since the start of 2020, according to securities deposits. Silvergate Capital SI, +13.00% a competing lender that shifted its business to crypto a decade ago, received at least $3.6 billion.

Borrowing from commercial bank Signaturea, known primarily for multi-family home loans before jumping into the crypto craze, is more than double its previous highest sum in several years. Silvergate, meanwhile, had no home bank loans 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, thrifts, credit unions and insurers. Made up of 11 government-chartered co-operatives, the Federal Home Loan Banks, also known as FHLB, were founded to help support housing finance 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 their liquidity is part of the FHLBs mission, some observers say supporting the crypto industry’s spinoffs falls far short of the original intent.

That’s why I warned of the dangers of allowing crypto to intertwine with the banking system, said Sen. Elizabeth Warren (D., Mass.). Under no circumstances should taxpayers be left behind by the collapses of the crypto industry, a market brimming with fraud, money laundering and illicit financing.

Banks began hemorrhaging deposits last year when crypto prices crashed and FTX, one of the biggest exchanges in the industry, filed for bankruptcy. The two were among a small subset of banks that sucked up deposits from crypto companies when the industry was booming and many other banks shunned their business.

Deposits fell at Signature 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 resulting in a loss of more than $1 billion in the fourth quarter. Shares of Signature and Silvergate have fallen about 60% and 85%, respectively, over the past year.

Eric Howell, chief operating officer of Signatures, said higher bank borrowing is historically quite low for banks, especially as Federal Reserve tightening has drained liquidity.

Silvergate declined to comment. The bank took 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 jumped to $661 billion in the third quarter of last year, the latest period for which data is available, 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 lured by higher-yielding Treasury bills and money market accounts. According to the Federal Reserve Bank of New York.

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

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