6th National Silver Dollar Convention
St. Louis, Missouri
November 11 -17, 1985
Numismatics & Banking – A New Partnership
By Hannes Tulving, President
Hannes Tulving Rare Coin Investments
A new symbiosis has begun to form between the banking and numismatic communities. Beginning in the late 1982 with West Coast Bank of Encino, California, an increasing number of banks have begun to finance rare coins and to use them as collateral for loans. Although few in number, their ranks are growing. A trend is in motion. By the end of the decade, it is likely that you’ll be able to use coins to obtain loans at dozens, perhaps even hundreds of major financial institutions around the United States. As a result, numismatics will gain increasingly greater legitimacy, stability and value.
Banks, collectors, investors and dealers all stand to profit from such cooperation.
In years past, most banks refused to accept rare coins as collateral because of their perceived lack of liquidity. While many bankers recognized the value of rare coins, they also recognized that it would take TIME to liquidate such materials should the borrower default. As time is money, industry consensus was that possible profits were not worth the undeniable risk.
All of this began to change in 1978. As the threat of double-digit inflation loomed on the horizon, the demand for “tangibles” increased. Coins, a commodity of necessarily limited supply, began to look increasingly attractive. Prices skyrocketed. Profits soared. New dealers rushed into the market. By 1980, with inflation hitting 18 percent, collectors had lost their control over the marketplace. Numismatics now belonged to the collector/investor.
The recession of 1981-82 threw a bucket of cold water on the overheated numismatic marketplace. Prices skidded. Many investors bailed out. But – more importantly – MANY STAYED. People who had never owned a rare coin in their lives suddenly recognized the long-term potential of numismatics. They put more money into the market, thus helping to stabilize prices. They brought needed financial sophistication to the marketplace.
By the recession’s end, numismatics had emerged stronger than ever. Between 12 and 15 million Americans – many of them investors – were estimated to be buying and selling rare coins. Established prices guides like Bob Wilhite’s “Coin Market” appearing in Numismatic News and the Rare Coin Market Digest investors’ wholesale price guide were becoming recognized outside the industry as accurate and reliable sources of up-to-date coin prices. Computer networks had been established to instantly communicate the latest buy and sell quotes between dealers nationwide. Numerous books had been published to educate the novice as to the intricacies of rare coin investing. Third-party reports, such as several Salomon Brothers surveys that ranked rare coins as the number-one investment of the decade, added further legitimacy to the industry.
Numismatics were now the most sophisticated tangibles outside the bullion. Like stocks and bonds, they had an organized system of buying and selling. Like real estate, coin values could be determined easily by expert appraisals. They had demonstrated the strength and stability conservative financial institutions look for in a “good investment.”
Most importantly, coins had demonstrated superior LIQUIDITY. Most quality specimens could be sold for prevailing bid in less than 24 hours. At the same time, traditional collateral such as real estate was now taking months, sometimes even YEARS to sell.
The time had come for banks to act. In mid-1982, one did.
In September 1982, West Coast Bank of Encino, California, became one of the first banks in the U.S. to accept rare coins as collateral on a loan. Following an appraisal by the bank’s numismatic department, borrowers could receive loans totaling 50 to 60 percent of their coin’s current “bid,” or wholesale value.
Such treatment of rare coins not only provided a source of ready cash for the rare coin dealer or investor. It also meant that coins could now be LEAVERAGED, much like real estate. By putting down $10,000, the dealer or collector/investor could buy up to $25,000 worth of rare coins; the $15,000 balance was borrowed using only the coins themselves as collateral. Although interest and service charges had to be paid, the rapid appreciation of many coin types – plus the opportunity to write-off interest when figuring federal income taxes – made this leveraging arrangement extremely profitable for many collectors/investors.
Between September 1982 and April 1984, West Coast Bank issued approximately $17 million in loans against rare coin portfolios. All but approximately $1 million was loaned to rare coin dealers. The balance was loaned to rare coin dealers. The balance was loaned on the retail level through a small group of approved dealers.
Although this $17 million figure is undramatic by industry standards, it did send a loud and important message to the marketplace: coins are good and valuable consideration offering ease of liquidity and long-term value.
Unfortunately, problems unrelated to its numismatic ventures caused the demise of West Coast Bank on April 27, 1984. Taken over by the FDIC, it continued to honor its outstanding loan agreements until the contracts had run their course.
Despite West Coast’s failure, an important precedent had been set. Coins had demonstrated their viability as loan collateral. Numismatics had proven itself worthy of acceptance by the mainstream financial community. No longer could coins be treated as second-rate barter. They had won their rightful place within the spectrum of fully legitimate financial assets.
Today, an increasing number of banks are accepting rare coins as collateral against cash loans. In most cases, the cash-to-value ratio is 50 percent. Borrowers can receive cash totaling up to half of their portfolios’ value or double their buying power in a leveraging situation.
Increasing cooperation between banks and the numismatic community has done far more than simply give individuals the chance to enjoy the greater profits. It has given added strength to the market overall.
Dealers are now borrowing against standing inventory to raise funds with which to buy more coins. Collectors/investors likewise are using their current holding as leverage with which to increase their holdings. With more money entering the marketplace, prices are going up. Liquidity is further increasing. Long-term prospects for strong, steady appreciation appear excellent.
The past few years have seen a market improvement in the relationship between numismatics and the banking industry. With rare coins showing greater strength with each passing month, we look forward to a time when ALL loan departments will eagerly accept these materials as readily as stocks, bonds and other traditional investment instruments.