The Federal Home Loan Bank (FHLB) system is suddenly finding itself bailing out numerous cryptocurrency-friendly banks, such as Silvergate and Signature. Estimates suggest they received over $15 billion in advances from the network combined.
FHLBs were established in the wake of the great depression, designed to provide funds to any residential housing finance member, or to “any community financial system” for small businesses and farms. FHLBs don’t receive taxpayer funding, are privately owned, and don’t follow the majority of their initial guidelines.
That’s how they genuinely explain the system themselves, though they now describe their goal as “providing liquidity by raising funds in the global financial markets, then lending that money in the form of ‘advances.’”
The system is composed of 11 banks around the US, all operating independently. That said, each member relies on the other to act as a backstop when loans go wrong. FHLBs have access to global debt markets and generally maintain high credit ratings so they can give members ‘advances’ — or low interest loans — and provide dividends for stockholders.
To receive an advance from an FHLB, a bank, credit union, or financial institution has to be a member of the system (which contains around 7,000 members). Second, the entity must meet a set of capital requirements defined by the FHLBs. Lastly, the entity has to hold a certain amount of “stock” in the FHLB system. Shares are sold for $100 each at a set rate.
FHLB advances to crypto-friendly Signature and Silvergate
Signature Bank received loans from the FHLB of New York. Its vice-chair, Larry Thomspon, is chairman of the board of FTX US Derivatives, known as LedgerX until it was acquired by FTX US in 2021. Thompson was re-elected to his position at the FHLB of New York in November, right when FTX declared bankruptcy.
Signature helped to bank Alameda Research, FTX, FTX US, and possibly other Sam Bankman-Fried entities, at least throughout 2021. It’s unclear whether or not Thomspon recused himself from the advances given to Signature in 2022 — which increased significantly compared to the previous year.
Indeed, with about $50 million in New York’s FHLB stock, Signature’s advances increased from $2.63 billion to $11.28 billion from 2021 to 2022.
Meanwhile, Silvergate shares increased in the FHLB of San Francisco, from $19 million in 2021 to almost $25 million the next year. According to American Banker, no advances were given in 2021 — but $4.3 billion in advances were offered the following year.
Both crypto-friendly US banks have experienced a recent run on deposits as wary investors exit long positions. These events have mostly coincided with the collapse of FTX, along with their acknowledgement that they helped bank related entities.
Since November, Silvergate and Signature have seen their stock prices tumble by 75% and 20%, respectively.
While FHLBanks are not publicly owned, they are government sanctioned, regulated by Congress, and receive financial benefits because of this. Cryptocurrencies are having a real-world effect on FHLB member financial institutions, which in turn are able to acquire incredibly low interest rate loans to cover liquidity issues at their respective institutions.
The FHLB of San Francisco declined to comment.