Crypto Banks Borrowed Over $13 Billions To Resist The Effects Of A Surge In Withdrawals

Key Points:

• In an effort to stop a wave of client withdrawals, two of the largest crypto banks serving cryptocurrency startups have borrowed billions of dollars from Federal Home Loan Banks.
• The company is said to have made a nearly $10 billion loan to the commercial bank Signature Bank in the last quarter of 2022, making it one of the biggest bank borrowing deals in recent memory.
• Silvergate, which requested at least $3.6 billion from the FHLB, was the second bank to submit a request.

According to an article in The Wall Street Journal, the Federal Home Loan Banks System (FHLB) of the United States is financing billions of dollars to two of the biggest crypto banks in an effort to lessen the impact of a spike in withdrawals.

The FHLB is an association of 11 regional banks from different parts of the country that lend money to other banks and lenders. The system, which was started during the Great Depression to promote home finance, now has over 6,500 members and $1.1 trillion in assets.

According to securities filings, Signature Bank borrowed about $10 billion from its neighborhood home loan bank in the fourth quarter, making it one of the highest such borrowings by any bank since early 2020. The New York Department of Financial Services gave Signature permission to use blockchain technology for its digital platform in 2018.

The borrowings at Signature, a commercial bank formerly best known for lending on multifamily real estate, are more than twice as much as their previous record high in recent years. In contrast, Silvergate had no bank borrowings for house loans a year earlier.

At least $3.6 billion was given to Silvergate Capital Corp., a rival lender that turned its focus to cryptocurrency ten years ago. Silvergate had huge deposit losses in the last quarter of 2022 and responded by selling debt instruments, among other things, to maintain cash liquidity.

In contrast to the previous quarter, when deposits hit $12 billion, the average digital asset client deposit in the fourth quarter of 2022 was $7.3 billion, per Silvergate’s report.

Following the demise of FTX, traditional finance has been immune to the crypto contagion, but the paper warns that FHLB loans to banks with exposure to the cryptocurrency might raise that risk.

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