Crypto Chaos snags Wall Street’s second-to-last resort lender

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(Bloomberg) – A Depression-era safety net that Wall Street banks use for short-term funding is the latest corner of traditional finance to be trapped by the upheavals in the banking industry. cryptography.

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For decades, the Federal Home Loan Bank System has been a preferred option for lenders in need of cash. But recent revelations that some of the money went to crypto-friendly banks after the collapse of digital asset exchange FTX is fueling concerns about mission creep, with funds going far and wide. home loans that the program was originally designed to stimulate.

Every year, US lenders use the FHLBank system to borrow hundreds of billions of dollars at rock bottom rates and without the stigma of asking for help from the Federal Reserve. It is widely seen as a safety net during crises and economic downturns and has been dubbed the penultimate lender, a play on the moniker of the federal government’s famous discount window.

The wobbly public policy debate over the role of FHLBanks is now turning into a political one after crypto-friendly financial firms Silvergate Capital Corp., Signature Bank and Metropolitan Bank Holding Corp. recently reported receiving loans. The disclosures dovetail with warnings from major regulators that crypto could eventually threaten the financial system.

It’s the most attention they’ve received in years, Michael Bright, managing director of the Structured Finance Association trade group, said of the lenders. It’s a strange irony. Many banks have access to FHLBs but do not use advances for mortgage cash, said Bright, a former acting director at Ginnie Mae.

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Ongoing review

FHLBanks lenders note that in nine decades the system has never suffered a loss on its loans, which are known as advances and must be fully secured by certain assets, including mortgages or government guaranteed securities. Yet critics are unhappy that the financial giants are steadily tapping into the source of funding originally created under President Herbert Hoover to bolster mortgages for their short-term financing needs.

Although the FHLBanks are not government lenders, their debt is considered implicitly backed by the United States because they have a backing line from the Treasury Department.

Even before the FTX collapse in November, the FHFA was conducting a sweeping re-rating of banks, called the FHLBank System at 100.

That review is ongoing, the regulator said in a statement. He added that he expects the 11 FHLBanks scattered across the country to carefully underwrite the advances, include an assessment of the financial status of the FHLBank members to whom the advances are made, and be in communication with the dogs of guard on any problem.

As of September 30, FHLBanks had more than $650 billion in loans outstanding. That’s an increase from around $350 billion at the end of 2021, and a sharp reversal of an overall downward trend in their lending activity.

A representative from FHLBank San Francisco, which lent to Silvergate, and one from FHLBank New York, which provided loans to Signature Bank and Metropolitan Bank, both said they conduct ongoing credit and financial situation of each member. The officials added that the loans are granted in accordance with proper risk management practices.

The implosion of FTX, which continues to proliferate in crypto markets, is not the first time the program has come under fire.

FHLBank officials began to coordinate more with banking supervisors after the system drew criticism for advancing tens of billions of dollars to Countrywide Financial during the financial crisis as the firm filed bad debts. , according to Timothy Yeager, a professor at the University of Arkansas and a former Fed economist.

At the time, Charles Schumer, a New York Democrat who is the Senate Majority Leader, said Countrywide was using an FHLBank as a personal ATM.

Crypto crisis

Strengthening banks hit by a crypto crisis represents a further departure from the original intent of the program, according to Todd Baker, a senior fellow at Columbia Business School. The question is, should the Federal Home Loan Bank enter into a transaction with a high-risk bank that has no mortgage business? he said.

Silvergate, Signature Bank and Metropolitan Bank all meet capital requirements set by regulators. Separately, they also said that the fallout from the FTX implosion did not put this at risk.

Silvergate said the FHLBank loans were part of the wholesale funding it tapped to meet cash outflows. The bank declined to say whether it would continue to use the program to manage cash.

Signature Bank said it was reducing customer deposits of digital assets as part of a previously announced plan, and advances from FHLBank it obtained replaced those short-term deposits.

The bank also said its activities align with the mission of the FHLBank program, noting that in 2022 Signature had generated more than $5 billion in multi-family assets or properties with a number of residential units. About $18 billion of the bank’s $19 billion multifamily portfolio is tied to lending in low- and moderate-income areas, he said, adding that he also provides tax credit financing. for affordable housing in New York.

The Metropolitan Bank recently announced that it will stop working with crypto companies. Although it said it had tapped loans from FHLBank for the first time in more than a decade late last year, the bank did not say it had to deal with the fallout from FTX.

FHLB’s $100 million advances in the fourth quarter of 2022 partially funded more than $200 million in loan growth and were repaid in early January 2023, said Mark DeFazio, the bank’s president and chief executive, in a statement.

Loans to banks

Whatever the purpose, lending to banks that have been involved in crypto has raised the stakes for the FHFA’s review of the program.

While loan advances must be secured by certain assets, there are no real legal constraints on their use, said Mark Calabria, who led the Federal Housing Finance Agency, regulator FHLBanks, during the Trump administration. Money is fungible. It certainly makes sense for Congress to consider this longstanding arrangement, added Calabria, who is now an adviser to the Cato Institute, a libertarian think tank in Washington.

The revelations also thrust FHLBanks into the crosshairs of lawmakers, who have long feared the digital asset industry is becoming increasingly intertwined with the US financial system. Senator Elizabeth Warren, a Democrat from Massachusetts, said she worries about the dangers of crypto seeping into the banking system.

Sherrod Brown, the Ohio Democrat who heads the Senate Banking Committee, also expressed concern. This issue is bigger than a case or a company, he said in a statement. I was concerned that when banks get involved in crypto, it would spread risk throughout the financial system.

–With help from Sally Bakewell.

(Updates with details on Signature Banks loans in 19th paragraph.)

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