The Upstart Tech Bank Trying to Shake Up Finance

The most interesting news in banking is happening in Ohio, but it’s really a Silicon Valley story. Erebor Bank, backed by Silicon Valley powerbrokers such as Palmer Luckey and Palantir co-founder Joe Lonsdale, is gearing up to start operating after getting conditional approval from regulators in Washington last year. 

In the largely commodity business of banking, Erebor aims to stand out by focusing on crypto and innovative industries such as AI and defense tech. Maybe the most surprising thing about Erebor is that it has embraced the banking industry’s heavy regulation rather than trying to bypass the rules, Silicon Valley style.

That means time and hard work. When Erebor is ready to open its doors—virtually, as the bank will have no branches—it will have spent months wrangling with regulators. The risk is that by then, there will be more competition from existing banks in its core businesses.

Here’s why Erebor is still a fascinating financial experiment. Thanks to its ties to Luckey, Lonsdale and others, it raised $350 million late last year, valuing the bank-to-be at a stunning $4.35 billion, according to Pitchbook. That’s a rich price for any bank.

Luckey’s involvement stems from his experience in 2023 when Silicon Valley Bank collapsed. Anduril was among the companies blindsided by the episode. Luckey saw a need for a replacement, one that would serve the underserved, though in this case underserved means startups and crypto companies, not poor people.

The bank will be located in Columbus, Ohio. Columbus is also where Anduril is investing nearly $1 billion in a 5-million-square-foot facility to build weapons and other defense equipment. 

The first question to ask about Erebor is, does the U.S. really need a new bank? Banking has been a tough business for all but the giants recently. The number of FDIC-insured banks has fallen by half since 2005 to 4,379 at the end of last year’s third quarter. The shrinkage doesn’t mean there’s a shortage of money to lend. Private debt funds have boomed during that period, lending trillions of dollars to businesses.

Erebor clearly believes some companies either need or want a new bank. The tech industry is more dependent on banks than in the past because of the rise of industries such as AI, defense tech and robotics, which require more capital than software makers. Crypto companies need banks to connect them to the mainstream financial system.

From the way Erebor is structured, it doesn’t appear that it will be a significant lender to tech, at least compared to the billions that are flowing in to fund AI. With the failure of Silicon Valley Bank in mind, Erebor emphasizes safety for its depositors, which will limit its lending. 

Prioritizing safety means the bank’s loan-to-deposit ratio will be low—in other words, it will lend less money relative to its deposits. It also will invest its depositors’ money in safe, short-term assets, which typically pay relatively low yields. (Silicon Valley Bank was undone because it invested in longer-term assets that lost value, spooking depositors.) Put together, these factors make it hard for the bank to earn significant profits from lending.

Erebor will likely generate most of its revenues from fees, in particular from crypto transactions. The bank will be built for this business, unlike traditional bank competitors that have pivoted to crypto, seeking to replace failed crypto-focused banks such as Signature Bank that went down amid the Silicon Valley Bank turmoil. 

The most prominent traditional bank that pivoted to crypto is Lead Bank. As my colleagues Yueqi Yang and Michael Roddan reported, Lead Bank has become a major link between crypto and the mainstream financial system in the past two years but is tightening its risk controls, potentially making it harder for crypto companies to operate. 

Erebor would step into this fast-growing market, and its marquee backers would be a draw for crypto companies. Other banks are already moving in this direction, seeing an opportunity for growth in a somewhat stagnant industry. Even the current Silicon Valley Bank, which First Citizens BancShares bought, is making noises about crypto. It is holding events this month in New York and San Francisco titled “Crypto Will Rewire Finance.” The bank wouldn’t comment on its crypto plans, citing the quiet period before its earnings this month.

Banking industry people are watching Erebor closely and generally hope it will bring innovation and growth to the industry. At the same time they worry that the bank could introduce new risks to the system. One concern is an age-old issue with banks in general: that when Erebor does make loans, they could go to companies closely associated with its backers. Regulators have worried about such related-party transactions for decades, fearing the loans have a higher chance of going bad. Another is that upheaval in the crypto industry could ricochet back onto the bank.

For these reasons, they expect regulators, even the friendly ones that gave the bank relatively quick approval, to also be watching closely. It’s a low bar, but this should be the most exciting show in all of banking.