Lenders of Last Resort

The $1.3 trillion institution that backstops American banks

Silvergate Capital is in the final throes of winding itself up. Last week, the bank – the first domino to fall in a cascade that brought down Silicon Valley Bank, First Republic and Credit Suisse – announced that it has repaid all remaining depositors, eight and a half months after beginning a process of voluntary liquidation.

At peak, Silvergate housed $14.3 billion of customer deposits. But ties to the crypto community, which accounted for 90% of deposits, led to a huge exodus in the weeks following the FTX collapse, and in the fourth quarter of last year customers pulled $8.1 billion. In a preview of what would unfold at Silicon Valley Bank, Silvergate couldn’t access cash quickly enough to meet demand. Its balance sheet comprised $11.0 billion of securities at fair value whose cost was $12.0 billion; selling them would have crystallized a $1 billion loss it could ill afford.

So La Jolla, California-based Silvergate paid a visit to its local Federal Home Loan Bank in San Francisco. As a “member”, it was entitled to draw on special loans. By the end of the year, it had tapped the Home Loan Bank for $4.3 billion, up from $0.7 billion at the end of September. Although it paid them all back by the beginning of March, the loans provided Silvergate with a lifeline that kept it afloat longer than its fundamentals warranted. 

Silvergate wasn’t the only struggling bank to make the trip to San Francisco. Three of the Federal Home Loan Bank’s six largest customers at year end 2022 would cease to exist a few months later; some 38% of its outstanding advances were to borrowers who wouldn’t make it. And it’s not the first time the Federal Home Loan Bank of San Francisco (FHLBSF) has found itself in that position. Two of its biggest four borrowers at the end of 2007, accounting for 32% of advances, failed over the course of the following year. 

FHLBSF’s Loan Book: 2022 versus 2007

The optics haven’t been lost on FHLBSF’s regulator, the Federal Housing Finance Agency (FHFA). In a report released earlier this month, authorities made a number of proposals to reform FHLBSF and its peers. The regional bank failures, they said, “highlighted the need for a clearer distinction between the appropriate role of the FHLBanks, which provide funding to support their members’ liquidity needs across the economic cycle, and that of the Federal Reserve, which maintains the primary financing facility for troubled institutions with immediate, emergency liquidity needs.”

So who are these Federal Home Loan Banks? Few outside the US financial services industry are familiar with them. Yet, with $1.3 trillion of assets, they wield a power that dwarfs their low profile. To learn more, read on.