Benzinga - In late 2022, two of the largest crypto banks, Signature Bank and Silvergate Bank, borrowed billions of dollars from the United States Federal Home Loan Banks (FHLB) system to cover a surge in withdrawals.
Signature Bank borrowed nearly $10 billion from the FHLB in the last quarter of 2022, making it one of the largest borrowing transactions by a bank in recent years, according to the Wall Street Journal. Silvergate Bank borrowed $3.6 billion at the end of 2022 to offset significant outflows and withdrawals by customers.
Although it seems reasonable to use these elements of traditional finance to protect retail investors in the crypto space, critics have pointed out that shoring up the crypto industry is not part of the FHLB’s original mission. Others warn that the cross-over between traditional finance and cryptocurrency risks exposes institutions like the FHLB to the toxic impact of the FTX and Alameda collapses, and all the unrealized losses by consumers.
"This is why I’ve been warning of the dangers of allowing crypto to become intertwined with the banking system," said Sen. Elizabeth Warren (D-MA) said.
"Under no circumstance should taxpayers be left holding the bag for collapses in the crypto industry—a market brimming with fraud, money laundering and illicit finance," she added, according to WSJ.
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The FHLB is a government-backed system created by the Federal Home Loan Bank Act to support mortgage lending and related community investment. The FHLB was created over 80 years ago during the Great Depression to support traditional housing lenders. There are now 11 regional FHL Banks and 6,800 member institutions. The system provides institutions with a source of funding for mortgages and asset-liability management, liquidity for short-term needs, and additional funds for housing and community development.
All 11 regional FHLBanks are privately capitalized and do not receive any taxpayer assistance. During the nation's 2008 financial crisis, the FHLBanks did not take government money and increased lending during the turbulent time period.
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