Martin Hutchinson: One Canadian entrepreneur may well be forging an innovative path to changing the global banking landscape – for the better. And in the process he may build the world’s safest bank.
Eric Sprott, the billionaire resource investment guru, is buying 51% of Ontario currency trader Continental Currency Exchange Corp., with the aim of making it into a financial institution that, refreshingly, will not make loans.
That’s not a misprint.
Sprott plans to structure his new Continental Bank to take deposits and generate income from currency trading and by selling precious metals.
True private banks already operate on this model. They lend no money. They simply take deposits, provide brokerage, custodial, and management services, and charge a commensurate fee. But often their minimums are $1 million and up, leaving most depositors with only standard banking options.
And right now, those options aren’t very appealing.
Breaking the Bank
You see, most banks today operate under a fractional reserve system, meaning they can lend out at least nine times the amount they have on deposit.
In the United States, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 of deposits. However, if you have more than that, they can’t help you. And more importantly, the FDIC could never cover all of the country’s deposits if there were a nationwide bank run.
In fact, the FDIC probably couldn’t even cover 5% of all U.S. deposits. Rather, the system is based on the hope that a multitude of bank runs won’t occur simultaneously.
That’s not the most reassuring way to stash away your money.
However, with Sprott’s model, you could rest easy knowing your money was backed by hard assets – and not being loaned out and leveraged.
“Our firm, Sprott Inc., and Eric have taken a very committed view that the financial system requires a substantial reset,” said Sprott Inc. Chief Executive Officer Peter Grosskopf. “Eric has always thought that offering consumers access to an unlevered bank is a good idea.”
That’s because Sprott knows that in a leveraged financial system, even small investment and loan losses can “break the bank.”
His goal is to one day allow customers to hold their deposits in gold- or silver-backed accounts. Checks could be written against those accounts to make purchases, which would then be debited, just like any other account.
Scott Penfound, VP of operations with Continental Currency, said “it’s the old commerce model of providing service instead of credit.”
Penfound and his family will stay on and manage the business going forward, while they retain 49%, and Sprott takes on the 51% balance in a passive role.
Bernanke’s Two Cents
Proponents of a gold-backed currency face a lot of criticisms. They’re often reminded about how impractical such a system would be. Safe storage involves logistics and costs, and carrying gold bullion or coins to pay for groceries surely wouldn’t be hassle free.
But no one said doing business in a post-fiat currency crisis world would be easy.
Presidential candidate Ron Paul in July had the opportunity to ask U.S. Federal Reserve Chairman Ben Bernanke if he thought gold was money. After a pregnant pause, Bernanke answered: “No. It’s a precious metal.”
I guess Ben’s view of history only goes back a century.
The fact is, gold in one form or another has been money for more of the past 3,000 years than has paper. Soberingly, every previous experiment with fiat currencies met with failure.
This time around, with fiat U.S. dollars as the world’s reserve currency, we’re navigating harsh uncharted waters.
In the increasingly likely event of a major financial collapse, Bernanke’s opinion won’t be worth two cents.
That tells me Sprott is onto something.
If Continental Currency is granted its federal banking license early next year, turning it into the Continental Bank, then Canada may well deserve its ranking as the safest banking jurisdiction.
With a bit of luck, Sprott’s view of sound banking may even become contagious.
Until then, keep hedging your greenbacks with gold.
Because they may not be safe – no matter what Bernanke tells you.
Related: SPDR Gold ETF (NYSE:GLD), iShares Silver ETF (NYSE:SLV), Direxion Daily Financial Bull 3X Shares ETF (NYSE:FAS), ProShares UltraShort Financials ETF (NYSE:SKF), Direxion Daily Financial Bear 3X Shares ETF (NYSE:FAZ),
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
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