Not all banks that serve 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 scrutinize the financials of banks that are still doing business with cryptocurrency firms, many are taking a closer look at the progress of those Federal Home Loan Bank firms to determine signs of stress as funds dry up. cryptocurrency deposits.
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 lending from the Federal Home Loan Bank of New York when it reports fourth-quarter earnings in on Tuesday, the executives said. From the FTX bankruptcy and the ensuing collapse of cryptocurrency, Signature executives have tried to explain how their full-service commercial bank differs from other banks that focused almost exclusively on cryptocurrency.
“We don’t lend in cryptocurrency,” Eric R. Howell, Signature’s chief operating officer, said in an interview. “We are an extremely well diversified financial institution with the majority of our loans in the multi-family sector. [market] in New York and in the office, retail and commercial real estate sectors. We don’t lend at all, at all, in the crypto space.”
Signature was one of the top 10 borrowers of the Federal Home Loan Bank of New York long before it entered the cryptocurrency business in 2019. It is one of the largest multi-family lenders in New York with a niche in rent stabilized properties in the 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 clients including cryptocurrency exchanges, stablecoin issuers, and miners. of bitcoin.
At the end of the third quarter, Signature had $1.4 billion in outstanding advances from Federal Home Loan Bank of New York, down from a high of $2.6 billion in the fourth quarter of 2021. The bank had a drop in deposits in the second and third quarter, but mortgage loan bank advances are still less than 2% of Signature’s total assets.
“We are truly the quintessential example of what the Federal Home Loan Bank was created for because whatever loan we have from the FHLB is backing our loans in the multi-family sector,” said Howell, who described the Home Loan bank loans as “a financing mechanism for us. It’s really just one part of our overall financing equation. We use these advances to finance our businesses.”
On Tuesday’s earnings call, Signature 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 crypto bank in La Jolla, California, has employed a strategy of pledging government securities to the home loan banking system in exchange for cash advances intended to prevent one more race on deposits. Most of its liquidity currently comes from Home Loan bank advances, company presentations show.
Teresa Bryce Bazemore, president of the San Francisco Home Loan Bank, posted a response Thursday on LinkedIn to questions about the billions in advances provided to Silvergate.
“FHLBanks has no oversight responsibility for the business operations of a member institution,” Bazemore wrote. “FHLBank San Francisco conducts ongoing assessments of each member’s solvency and financial condition based on information reported to the member’s regulator, the results of regulatory examinations, financial reports and other relevant information.”
Loans from mortgage banks have come under increased scrutiny as the system, a little-noticed public-private partnership that has largely gone unnoticed, undergoes its first regulatory review in decades by its regulator. , the Federal Housing Finance Agency. Mortgage lending banks were created to finance home financing, and some critics suggest that financing by Silvergate, which does not have a mortgage origination business, is an example of the system’s mission slow progress.
Banks that are members of the Home Loan banking system are required to post collateral, typically Treasury bonds or high-quality mortgage-backed securities, in exchange for short-term loans called advances that can be used to finance their operations. Banks can also make equity loans, such as commercial or multi-family real estate loans. All loans and securities are reviewed and valued based on interest rates, financial conditions and other factors. The system serves as a ready liquidity backup and secured lender that has become a core part of the banking system.
“You will see an increase in our [Home Loan bank] loans,” Howell said. “That’s why the Federal Home Loan Bank is there: to fill those funding gaps and shortfalls, and that’s what we’re using it for in the short term. We will look to increase deposits after that and then we will look to repay those loans.”
In response to questions about Signature’s loans, the Federal Home Loan Bank of New York said in a statement that its “credit products enhance the financial strength of local lenders by providing them with a reliable source of liquidity to meet credit and housing finance in their communities and support their balance sheet management strategies in all operating environments.”
Banks often give Mortgage Loan banks guarantees even when they don’t need liquidity immediately because they know that if the guarantee is under the system’s control, it has already been reviewed and quoted. As a result, banks can simply call their regional home loan bank for short-term financing when they need it.
Still, the less liquid securities that are pledged, such as full loans, come with a steep haircut or discount, typically between 20% and 25%. As an example, as of the end of 2021, Signature had pledged $8.1 billion in commercial real estate loans to meet collateral requirements for approximately $3.9 billion in FHLB loans, company documents show. Signature said it has more than $30 billion in borrowing capacity from the New York Home Loan Bank due to loans that have already been committed.
“We keep that dry powder in there at all times,” said Kevin Hickey, Signature’s chief investment officer and treasurer. “Liquidity is important to us.”