Not all banks serving the crypto industry can be painted with the same brush.
Some banks that courted the business of cryptocurrency firms and exchanges are now distancing themselves from the sector amid the fallout from the FTX bankruptcy and closer scrutiny from regulators, analysts and investors. As experts pour over the financials of banks that are still doing business with cryptocurrency firms, many are looking more closely at those firms’ advances from the Federal Home Loan Bank System to determine signs of stress as crypto deposits dry up.
Signature Bank, a New York bank with $114.5 billion in assets, is in the process of reducing its exposure to volatile crypto deposits and is expected to show an increase in borrowings from the Federal Home Loan Bank of New York when it reports fourth quarter earnings on Tuesday, executives said. Since the FTX bankruptcy and ensuing crypto meltdown, Signature’s executives have sought to explain how their full-service commercial bank differs from other banks that focused almost exclusively on the crypto.
“We don’t lend in cryptocurrency,” said Eric R. Howell, Signature’s chief operating officer, in an interview. “We are an extremely well-diversified financial institution with most of our loans in the multifamily [market] in New York and in office, retail and commercial real estate sectors. We don’t lend at all — at all — in the crypto space.”
Signature was a top 10 borrower of the Federal Home Loan Bank of New York long before it got into the crypto business in 2019. It is one of the largest multifamily lenders in New York with a niche in rent-stabilized properties in New York City. Signature made a name for itself when it became the first Federal Deposit Insurance Corp.-insured institution to launch a blockchain-based digital payments platform, which it called Signet, with customers that include crypto exchanges, stablecoin issuers and bitcoin miners.
At the end of the third quarter, Signature had $1.4 billion in outstanding advances from the Federal Home Loan Bank of New York, down from a peak of $2.6 billion in the fourth quarter of 2021. The bank had a drop in deposits in the second and third quarter but Home Loan bank advances remain less than 2% of Signature’s total assets.
“We are truly the quintessential example of what the Federal Home Loan bank was put in place for because any borrowings that we do have from the FHLB are supporting our lending in the multifamily sector,” said Howell, who described Home Loan bank borrowings as “a funding mechanism for us. It’s really just part of our overall funding equation. We use these advances to fund our businesses.”
On Tuesday’s earnings call, Signature’s executives are expected to distance themselves from other crypto banks, notably Silvergate Capital Corp., which received $4.3 billion in advances from the Federal Home Loan Bank of San Francisco in the fourth quarter. Silvergate, a small, La Jolla, California, crypto-friendly bank, has employed a strategy of pledging government securities to the Home Loan bank system in exchange for cash advances that are meant to stave off a further run on deposits. The bulk of its liquidity currently comes from Home Loan bank advances, company filings show.
Teresa Bryce Bazemore, the president of the Home Loan bank of San Francisco, posted a response Thursday on LinkedIn to questions about the billions in advances provided to Silvergate.
“FHLBanks do not have any oversight responsibility for a member institution’s business operations,” Bazemore wrote. “FHLBank San Francisco conducts continuous assessments of each member’s creditworthiness and financial condition based on information reported to the member’s regulator, the results of regulatory examinations, financial reports, and other relevant information.”
Borrowings from the Home Loan banks have come under increased scrutiny as the system, a little-noticed, public-private partnership that has largely flown under the radar, undergoes its first regulatory review in decades by its regulator, the Federal Housing Finance Agency. The Home Loan banks were created to fund housing finance and some critics suggest the funding to Silvergate, which does not have a mortgage origination business, is an example of the system’s mission creep.
Banks that are members of the Home Loan Bank System are required to post collateral, typically Treasuries or high-quality mortgage-backed securities, in exchange for short-term loans called advances that can be used to fund their operations. Banks also can pledge loans such as multifamily or commercial real estate loans. All loans and securities get reviewed and priced based on interest rates, financial conditions and other factors. The system serves as a ready liquidity backstop and secured lender that has become a central part of the banking system.
“You will see an increase in our [Home Loan bank] borrowings,” Howell said. “That’s why the Federal Home Loan Bank is there — to plug those funding gaps and those shortfalls, and that’s what we’re utilizing it for in the short term. We’ll look to grow deposits after that and then look to pay down those borrowings.”
In response to questions about Signature’s borrowings, the Federal Home Loan Bank of New York said in a statement that its “credit products enhance the financial strength of local lenders, providing them with a reliable source of liquidity to meet the housing finance and credit needs of their communities and support their balance sheet management strategies in all operating environments.”
Banks often pledge collateral to the Home Loan banks even when they don’t immediately need liquidity because they know that if the collateral is under the system’s control, it has already been reviewed and priced. As a result, banks can simply call their regional Home Loan bank to get short-term financing when they do need it.
Still, less liquid securities that get pledged such as whole loans come with a steep haircut, or discount, typically between 20% and 25%. As an example, at the end of 2021, Signature had pledged $8.1 billion of commercial real estate loans to meet collateral requirements of roughly $3.9 billion on Home Loan bank borrowings, company filings show. Signature said that it has in excess of $30 billion in borrowing capacity from the Home Loan bank of New York due to loans that have already been pledged.
“We keep that dry powder there at all times,” said Kevin Hickey, Signature’s chief investment officer and treasurer. “Liquidity is important to us.”