Erebor's $7 billion deposit surge tests its capital before its cash

At the end of June, Erebor held about $1.03 of cash for every dollar it owed depositors ^[20] and had lent out about 1.9% of its deposits ^[21]. As a defence against the kind of failure that ended Silvergate, that comes close to complete. Silvergate lost 68% of its deposits in one quarter and had to sell securities at a loss to pay them out ^[9]. The same outflow would have cost Erebor $2.76 billion at its June size, and its cash covered that about 1.5 times ^[22].

The June balance sheet is already out of date. The Financial Times reported more than $7 billion of deposits on October 6 ^[1], about $2.94 billion, or 72%, more than the call report showed ^[24]. A 68% run on that base is $4.76 billion ^[23]. Nobody outside the bank will know whether cash kept pace until the next quarterly filing. According to Crowdfund Insider, Erebor reports totals quarterly and has not released its number of accounts ^[12]. The FT's count of more than 500 customers ^[1] works out to roughly $14 million each ^[16]. The Federal Reserve's inspector general attributed Silvergate's liquidation to concentration in crypto depositors, fast growth, weak governance and funding made up almost entirely of uninsured, non-interest-bearing deposits ^[8].

Capital is the tighter limit. Total assets were $4.65 billion at the end of June ^[3]. Everything funding the bank other than deposits, equity included, therefore came to about $590 million ^[13]. So equity was at most 12.7% of the quarter-end balance sheet ^[14], seven-tenths of a point above the 12% Tier 1 leverage floor the OCC set for Erebor's first three years ^[5]. The reported 38.81% ratio ^[6] is only possible if it was measured against no more than about $1.5 billion of assets ^[19], roughly a third of what the bank carried at quarter-end. Assume Tier 1 capital is close to equity and that no capital was added after June. Then $7 billion of deposits pushes the ratio down to 7.8% at most ^[15]. Holding 12% at that size takes roughly $955 million of equity ^[18].

On liquidity, Erebor is doing what its co-founder promised. Luckey said the bank's business model rests on not letting clients' money disappear ^[11]. If Erebor raised equity after June (these sources do not report a raise), the cushion holds and the bank stays a cash holder that loses money on its assets ^[7]. If it did not, it either slows deposit intake or reports a third-quarter leverage ratio near or under the floor ^[5].

I think the cash solves the run problem and buys time for the business model. A bank that lends 1.9% of its deposits ^[21] has to keep raising equity to grow. If it starts putting the deposits to work instead, it takes on the exposure that sank Silvergate. This view is wrong if the next call report shows deposits near $7 billion, cash still above deposits and a leverage ratio well clear of 12% ^{[1] [5]}.