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.
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The Treasury Investment That's WAY Better Than Treasury Inflation Protected Securities (TIPS) - Money Morning:
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About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.
Probably Sprott is on a next big thing.
I think that everyone with less than 1 Million $ can take advantage of the Sprott system with
Sprott Physical Silver Trust ET (NYSEArca: PSLV )
Is that right?
"Checks could be written against gold- or silver-backed accounts to make purchases, which would then be debited, just like any other account."
This is unclear to me. Where that gold or silver stems from? Who physically brings it to the bank's vault: the bank -to back my deposit, necessarily made in the form of electronic or paper money- or myself? And what happens when I issue a check? Will the bank take away a correspondiing amount of gold/silver? And where will it be transferred?
Can you please better explain, to me but probably to many other readers? Thanks.
excellent question. Also, the check I issue becomes a deposit at another bank where it gets leveraged as before. So, what has changed? The gold bugs keep failing to follow through on the mechanics beyond bumper sticker slogans.
Also, the statement that banks can lend nine times what they have on deposit is patently false.
The correct statement is they can lend 90% of what they have on deposit. Huge difference! The leverage occurs from redeposits of proceeds up to 9 times.
I would certainly be interested in Continential Bank although I wonder about the minimum balance required.
which continenal bank are you writting about because in the web I found severals banks?please send me the link of this bank.
I feel Sprott has a very helpful, lucrative banking ideear, and more Bankers and those who have Peoples(Our Money) could consider this Plan.
I am invested in a currency right now, which will revalue soon.
I don't like Banks, nor do I trust them, not right now anyway.
This is brilliant! I would invest in this as well as keep my money here.
But, Alas, I live in California.
We need this here.
My take is this. If one is a millionaire plus, and manages their money correctly, there is no need to borrow.
I love the idea of a Bank not giving loans, and having their money and that of their depositors, backed by minerals. Not to mention the currency investment potential!
I want to be kept up to date on this.
Would one be able yo put their money in this Future Bank, and use a debit card here in the States?
This is awesome! I see a very exciting new kind of investment here, as other branches are planned.
J.P.Morgan said it best in 1908.Gold is the only true money.All else is an illusion for sure