The Federal Home Loan Bank of San Francisco confirmed Thursday that Silvergate Bank’s “outstanding advances have been fully repaid,” an effort that the firm had previously said in a regulatory filing could imperil the bank’s capital adequacy.
The La Jolla, Calif.-based Silvergate Capital Corp. took out $4.3 billion in advances from the Home Loan Bank of San Francisco in the fourth quarter of 2022 after facing a severe decline in deposits from its cryptocurrency clients. A spokesperson for the San Francisco Home Loan Bank confirmed to American Banker that Silvergate “had been been paying down the $4.3 billion over the last 2 months” and that the bank’s “outstanding advances have been fully repaid.”
In a March 1 filing with the Securities and Exchange Commission, the firm said that it was projecting additional losses from “a number of circumstances … including the sale of additional investment securities beyond what was previously anticipated and disclosed in the Earnings Release primarily to repay in full the Company’s outstanding advances from the Federal Home Loan Bank of San Francisco.”
Silvergate added in its filing that it expects to record further losses from the sale of additional debt securities in January and February. The company said it is “currently in the process of reevaluating its businesses and strategies in light of the business and regulatory challenges it currently faces” and that the company “is evaluating the impact that these subsequent events have on its ability to continue as a going concern for the twelve months following the issuance of its financial statements.”
“These additional losses will negatively impact the regulatory capital ratios of the Company and the Company’s wholly owned subsidiary, Silvergate Bank, and could result in the Company and the Bank being less than well-capitalized,” Silvergate said.
Silvergate used the liquidity provided by the San Francisco Home Loan Bank in the fourth quarter of 2022 to stave off a further run on deposits. The funding provided to Silvergate, known as advances, has been criticized as one way in which the crypto industry managed to find its way into the mainstream banking system.
The Home Loan Bank System is in the midst of a regulatory review by its regulator, the Federal Housing Finance Agency, which is determining whether the system is focused on its mission of supporting housing finance. The liquidity provided to Silvergate also has raised questions about whether the Home Loan Bank System should be serving a role reserved for banking regulators.
“How did the Home Loan banks become the lender of last resort?” asked William M. Isaac, a former FDIC chairman who is now chairman of Secura/Isaac Group.
If a bank that had received an advance from the Home Loan Banking system were to go bust, the FDIC would serve as receiver and would try to sell the bank to another bank or liquidate its assets. Either way, the FDIC would have to repay the advances to the Home Loan Bank, as well as prepayment penalties and interest. The FDIC would then take back the collateral pledged by the defunct bank and use the proceeds to pay off insured depositors, experts said.
“Why are we giving an entity like the Federal Home Loan bank, which is not a government agency, priority over FDIC claims?” Isaac asked.
At the heart of the debate is whether the Federal Home Loan Bank of San Francisco was merely abiding by its mandate to provide liquidity to a member-bank, or was serving as a de facto lender of last resort to a firm engaged in a risky and unproven line of business.
Ryan Donovan, president and CEO of the Council of Federal Home Loan Banks, a trade group for the Home Loan Bank System, said the government-sponsored enterprise adhered to its lending criteria.
“If we have a responsibility to lend to our members who are in good standing, credit-worthy, [and] bring eligible collateral and we make a decision not to lend based on the type of business that they are in, it’s very similar to the activities that were around Operation Choke Point,” Donovan said, referring to a Department of Justice probe, first disclosed in 2013, that had sought to prevent payday lenders from accessing consumer bank accounts by cutting off access to the payments system.