How is SoFi Treating Digital Assets for Regulatory Capital Purposes?
Looking at an updated FR Y-9C
In late November of last year, I wrote about a pair of letters a few Democratic Senators had written to SoFi and to the federal banking regulators. Those letters questioned, among other things, how SoFi was calculating its risk-weighted assets for digital asset exposures.1
The November post noted the following based on a regulatory report called an FR Y-9C filed by SoFi with the Federal Reserve Board on November 9, 2022:2
Among its balance sheet assets, SoFi reported holding certain “other assets,” of which $132,456,000 were what SoFi described as “safeguarding digital assets.” This amount corresponded to an 8-K issued by SoFi in response to the Senators’ letter. That 8-K stated that “digital assets held by third-party custodians for the benefit of our members, which is recorded on our consolidated balance sheet, totaled approximately $132.5 million.”
SoFi reported that it assigned the following risk weights to “other assets” for purposes of calculating risk-based capital ratios:3
0% risk weight: $132,485,000
100% risk weight: $680,595,000
250% risk weight: $60,706,000
“Other Risk-Weighting Approaches”: $2,067,000
All other risk weights (e.g., 400%, 1250%): $0
After looking at the above data, the November post concluded that SoFi was assigning either a 0% risk weight or a 100% risk weight to its digital asset exposures. It went on to say that, among these possibilities, the more defensible position was probably to assign the exposures a 100% risk weight:
Based on this, it appears that all or almost all of SoFi’s digital assets are being assigned either a 0% risk weight or a 100% risk weight. Between the two, I would guess that SoFi has chosen to assign its crypto to the 100% risk-weight bucket. This is because the Board’s capital rules require that a 100% risk-weight be assigned to all assets not specifically assigned a different risk weight or deducted from capital, and currently the Board’s capital rules do not address crypto.
If that is the approach SoFi has taken, it would be assigning to the crypto in the omnibus account the same risk weight that banks assign to, for example, ordinary corporate loans. Is that the right outcome? It does not quite feel right. It is a lower risk weight than that assigned to most equity exposures when calculating credit risk RWAs, and it is also a much more forgiving approach than the proposed Basel treatment of certain crypto exposures.
At the same time, though, if this is in fact what SoFi is doing, I do not think you can say it is necessarily an incorrect application of the capital rules as currently written, and in any case as a relative matter SoFi is correct that the amounts in question here are not material.
A December Update
This morning I was looking back at SoFi’s FR Y-9C for Q3 2022 for an unrelated reason. In the course of doing so, I noticed that SoFi filed an updated Y-9C for Q3 on December 8, 2022.
Notably, on Schedule HC-R, Part II - i.e., the schedule setting out the risk weights that a banking organization has assigned to its exposures - line Item 8 regarding other assets has been updated as summarized below.4
So, per the updated FR Y-9C filing, SoFi no longer assigns a 0% risk weight to $132,485,000 of its “other assets.” In addition, the amount of “other assets” assigned to the 100% risk weight bucket has increased by $132,456,000.
Given that SoFi no longer assigns any of its “other assets” a 0% risk weight, and given that none of the amounts assigned to any other risk weight bucket are large enough to encompass the “safeguarding digital assets” component of other assets on SoFi’s balance sheet, it is possible to now with reasonable confidence conclude that SoFi has indeed assigned a 100% risk weight to its digital asset exposures.
That leaves the following possibilities:
SoFi was treating its digital asset exposures this way all along, and the December 9 update in the RWA buckets to which SoFi's “other assets” are assigned reflects a change to SoFi’s view as to the proper risk weights that should be assigned to some other type of "other assets."5
SoFi was originally assigning its digital asset exposures to the 0% bucket, but subsequently changed its mind, either in response to the Senate letter, regulatory feedback from the Board, or for some other reason.
I do not know for sure which of these possibilities is right, but as alert readers probably already noticed, the $132,456,000 by which the 100% risk-weight bucket increased between the originally filed Y-9C and the amended Y-9C corresponds precisely to the amount of “safeguarding digital assets” reported by SoFi on its balance sheet.
Thanks for reading. Thoughts, challenges, criticisms are always welcome — especially on this post! You can get in touch at bankregblog@gmail.com
I am going to use this terminology throughout, even though these aren’t necessarily exposures in the traditional sense, but rather are essentially custody assets that would not be reflected on the company’s balance sheet at all, were it not for SAB 121.
A copy of the report as of November 9, 2022 is available here.
Other assets for purposes of this schedule to the FR Y-9C is defined more broadly than other assets as defined for purposes of the FR Y-9C balance sheet. For example, things like premises and other real estate owned, each of which get their own line item on the balance sheet, get lumped into other assets for purposes of the risk weighting schedule.
This is on pages 62-63 of the FR Y-9C.
I did not go through the FR Y-9C schedule by schedule to see what other changes, if any, were made in the updated report. So, to be clear, it is possible that the amended report was filed for reasons completely unrelated to risk weights (of digital assets or otherwise), and this update was merely ancillary. For details on when amended reports are required to be filed, see page GEN-8 here.