Basel III: Gold to be considered for Tier 1 status

[pmbug]

The GSIBs cannot raise their cash reserves 16%. That's what I got from the report.

 

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Fed’s Barr says ‘broad’ changes coming to Basel III capital proposal​

Federal Reserve Vice Chairman for Supervision Michael Barr said today that regulators expect “broad and material” changes are coming to the proposed Basel III endgame capital standards, Bloomberg News reported. Speaking at a University of Michigan event, Barr echoed Fed Chairman Jerome Powell’s March 6 testimony before the House Financial Services Committee, in which he told lawmakers that significant changes will likely be made before the rule moves forward. Barr is the chief proponent of the proposal.

“I am working very closely with Chair Powell and other members of our Federal Reserve board to try to reach a broad consensus,” Barr said, according to Bloomberg. Specifically, he said criteria related to operational, market and credit risks could be adjusted.

More:

Fed’s Barr says ‘broad’ changes coming to Basel III capital proposal | ABA Banking Journal

Barr's comments echoed Fed Chairman Jerome Powell’s March 6 testimony before the House Financial Services Committee.

bankingjournal.aba.com

 

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LBMA faces challenges as it looks to establish gold as a High Quality Liquid Asset​

(Kitco News) - Gold has established itself as a store of value for thousands of years; however, the London Bullion Market Association says it faces further work to establish it as an important financial asset within the larger global marketplace.

After helping bullion banks avoid a funding crisis because of Basel III regulation, the LBMA said they are now focused on getting physical gold recognized as a High-Quality Liquid Asset (HQLA).

According to the Basel Framework, laid out by the Bank of International Settlements (BIS), financial institutions must hold HQLA to cover their total net cash outflows over a 30-day period under the stress scenario.

More:

LBMA faces challenges as it looks to establish gold as a High Quality Liquid Asset

Kitco News' general-interest stories takes a look at what is making headlines in the marketplace and how that is impacting precious metals prices

www.kitco.com

Update:

LBMA and WGC met with BIS to reclassify gold as a High-Quality Liquid Asset under new Basel III banking rules: GJEPC report​

Jul 11, 2024 - 12:27 PM

(Kitco News) – The London Bullion Market Association (LBMA) and the World Gold Council (WGC) are pushing to have gold reclassified under the Basel III banking framework, according to a report published Thursday by India’s Gem & Jewellery Export Promotion Council (GJEPC).

The GJEPC wrote that senior LBMA representatives including Paul Fisher, Ruth Crowell, David Gornall, and Edel Tully, joined the WGC’s Mike Oswin in Basel, Switzerland for a meeting with the Bank of International Settlements (BIS). The LBMA-WGC delegation met with Neil Esho, Secretary General of the Basel Committee, and Noel Reynolds, the Head of Basel III Implementation, to make the case for gold as a High-Quality Liquid Asset (HQLA).

The reclassification of gold from its current status as a Tier 1 asset to an HQLA “would bring about enhanced market stability, improved liquidity, regulatory compliance benefits, greater confidence and trust in the financial system, and overall economic and financial stability,” the GJEPC report said. “This would be advantageous for both financial institutions and the broader economy.”

More:

LBMA and WGC met with BIS to reclassify gold as a High-Quality Liquid Asset under new Basel III banking rules: GJEPC report

The Kitco News Team brings you the latest news, videos, analysis and opinions regarding Precious Metals, Crypto, Mining, World Markets and Global Economy.

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An integrated approach to a safer and more resilient banking system

Keynote address by Mr Agustín Carstens, General Manager of the BIS, at the Central Reserve Bank of Peru, Reinventing Bretton Woods Committee and Inter-American Development Bank 15th Annual Conference: "The rewiring of the global economy", Cusco, 19 July 2024.

www.bis.org

 

[nickndfl]

In 3 years gold will go to $5k and everything except rare numis will go into the smelter to make large bars for central banks.

 

[pmbug]

Considering Trump wasn't supposed to win (or at least, isn't in the globalist's club), I don't think the BIS anticipated Trump's tariffs over a decade ago when they developed the Basel III framework.

The LBMA lobbied to have the NSFR requirement lowered back in 2019 but were denied by the Basel Committee. They (LBMA) warned then that "the rules could mean a number of banks stop trading or settling gold, curtailing market liquidity."

Scotiabank announced the closing of it's gold trading desk in 2020 because "increasing regulation has required more capital to be put aside to back trading, making it less profitable."

LBMA protested the NSFR again in 2021 and again were rebuffed. I'm not aware of any further banks closing their gold trading desks like Scotiabank did, but it's hard to imagine what the market might look like if JPM ends up closing their gold trading desk because of Basel III / NSFR.

 

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The LBMA published this article in October 2024:

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Since the 2023 US banking crisis, there have been calls to review LCR and NSFR requirements.

LBMA, together with the World Gold Council (WGC), has been engaging with BCBS as well as prudential regulators and central banks from strategically aligned nations. In Q4, we have a busy schedule of outreach with these various stakeholders and will be updating you, the Member, on significant developments.

Back in 2013, there was an uninformed perception of gold and a broad lack of understanding of the market dynamics and its infrastructure; it was perceived to be an asset with too much volatility.

It’s reasonable to argue that in the intervening years much of that perception challenge has changed – in 2010, the official sector purchased a paltry 79.2 tonnes of gold, but by 2023 that buying had surged to 1,030.4 tonnes (source: WGC). A central bank community that continues to buy a lot of gold reflects gold’s merit within the financial system.

The WGC has commissioned an independent academic study to examine gold’s case for HQLA reclassification, the results of which will be published later this year. The early learnings show that gold’s liquidity, as indicated by bid-ask spreads, is similar to typical Level 1 HQLAs including 30 Year US Treasuries; gold’s spread was one of the most favourable of a host of global government bonds during the SVB crises. Looking at the volatility of the bid/ask spread, gold’s is very similar to that of 30 Year US Treasuries. In short, gold hedges risk assets and performs differently to bonds, hence contributing to the resilience of a portfolio.

According to the BIS LCR dashboards, Level 1 assets are the most widely used within a bank’s Liquidity Coverage Ratio; indeed, many banks don’t want to hold Level 2 assets. We believe that broadening the amount of assets available in Level 1 to include gold would create a diversification benefit as gold is negatively correlated with many asset classes. Current data shows that gold’s liquidity characteristics as measured under the Uniform Definition of Liquid Assets hold similar liquidity metrics to those of 10 Year US Treasuries.

We feel very confident to state that had the gold trading data available today been accessible in 2013, gold would have undoubtedly been classified as either an extremely High-Quality Liquid Asset or a High-Quality Liquid Asset.

Gold doesn’t deserve a reclassification simply because the data now shows that it meets the criteria; perhaps more importantly, gold has demonstrated through the GFC, through COVID-19 and through the US banking crisis that it contributes to the stability of the financial system. The process for change is long and drawn-out, but we are hopeful that change will happen.

Gold and the Path to HQLA Status | Alchemist

Following the global financial crisis of 2008, prudential regulators implemented wholesale changes to banking regulation.

www.lbma.org.uk

 

[WinkWink]

 

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[pmbug]

This report is from November 2023:

Let’s dissect the recent story about the effect on gold with Basel 3 and ask the real question, How do banks remove the 85% required stable funding ratio for gold? Keep in mind, Basel III is an international voluntary regulatory framework designed to strengthen bank capital.

Britain carves out exemption for gold clearing banks from Basel III rule (Read full article)

There are 4 important quotes in the story and the rabbit holes are endless.
...

More:

Basel 3 and Londons Relationship with Gold - Idaho Armored Vaults

Bob examines the impact of the Basel III regulations on gold trading, focusing on how banks navigate the 85% required stable funding ratio. It provides an in-depth analysis of a recent decision by the Bank of England's Prudential Regulatory Authority to modify its approach towards precious metal...

www.goldsilvervault.com

I missed that bit of news.

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Vince Lanci posted on X that he might record a podcast with Tom Luongo, Eric Yeung and Bob Coleman discussing the Basel III issue.

 

[nickndfl]

When they made gold a Tier 1 assest it was like being added to the S&P 500.

 

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[pmbug]

This is from 2021 and I don't know if regulators changed any of the implementation rules since then:

 

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Basel III Makes It Official: Gold Is Money Again

For my entire decades-long career in capital markets, I’ve made the case that gold is not just a shiny relic of the past, but a serious, strategic asset for modern investors. After years of pounding the table, it feels pretty good to say that the world’s central banks—and now the U.S. banking...

www.usfunds.com

 

[nickndfl]

Spot will probably go down on July 1st because they want us to know they are still in control. No doubt US banks are front running gold.

They will be able to officially cost-effectively loan against their gold holdings in about 6 weeks.

It would be good to lower interest rates now to smooth out the spikes. We have been witnessing monthly $100 increases in spot, so $4k by the end of the year is no longer crazy talk.

Buy krugerrands at spot.

 

[pmbug]

There have been inaccurate reports online that gold will be reclassified as Tier 1 HQLA (High Quality Liquid Asset) under Basel III as of July 1, 2025. This information is not correct; no official announcement has been made or is expected on gold gaining HQLA status. 

Why is there confusion?

There is a lot of online misinformation about Basel III more broadly. Related to gold specifically, various websites state that gold will be reclassified as Tier 1 HQLA on July 1. Let’s pause here. Tier 1 refers to capital rules that were written in the original Basel Accord in July 1988 which became known as Basel 1. HQLA is a function within the liquidity rules of LCR and NSFR which were first written into Basel 3 and implemented by Basel on January 1, 2019. People are getting mixed up between capital rules and liquidity rules. LBMA is advocating for gold to be reclassified as Level 1 HQLA – again note this isn’t Tier 1 because HQLA relates to a liquidity rule.

A lesser number of articles say that gold is due to become Level 1 HQLA but again this isn’t correct, as stated above no announcement has been or is expected.

Gold is already a Tier 1 asset under the Basel Capital Accords meaning that it has a 0% risk weight. This is true for all three Basel Accords. The rule states that gold held in a bank’s own vault is deemed as a Tier 1 asset with a zero-risk weighting. Nothing has changed since the original Basel I Accord was created in 1988.

Gold is not due to be reclassified as a Level 1 HQLA – if it were, we and the WGC would be the first to shout about it. LBMA continues to advocate with the central bank and prudential regulatory community that gold meets all criteria to warrant HQLA status. The latest research on this, by Professor Dirk Baur et all (2024) (SSRN), argues that gold meets the characteristics of a Level 1 HQLA, namely low bid-ask spreads, high volumes, relatively low volatility and negative correlation with risky assets during stress periods. The quantitative analysis shows that gold is highly liquid and, indeed, among the most liquid assets across a sample of top tier government bonds both on a long term and during a financial stress event. Gold generally performs similarly to a 30-year US Treasury bond. Adding gold to a HQLA portfolio enhances its resilience. The paper also includes a revised liquidity test that was first used in 2013 by the European Banking Authority. Gold is remarkably liquid with an Amihud measure of 0.102 compared with US Treasury bonds with Amihud measure estimates ranging from 0.055 (3-5 year bonds) to 1.321 (10-20 year bonds). A further SUERF Policy Brief, written by David Gornall (Senior Advisor, LBMA, and LBMA Chairman June 2011 to July 2014) and Edel Tully (Director of Financial Services, LBMA), makes a similar argument for gold as a Level 1 HQLA.

What are the different weightings for gold currently within Basel III?

There is often some confusion over the status of gold within Basel III due to the different weightings and ratings that are used within the rules of the 1,600-odd page rulebook.

There are three percentages relating to gold: 0%, 20% and 85%: 

0%
Gold benefits from a 0% rate for Bank Tier 1 capital. Claims secured by allocated gold also have a 0% risk weight under the Risk Weighted Asset credit risk rules. This is the same as for cash and was the same treatment used in the first version of Basel.

20%
The current Basel-based prudential regulatory framework allows clearing houses the ability to accept gold as a collateral for margin payments with a haircut of 20%. 

85%
As gold sits outside of the High-Quality Liquid Asset list, it suffers from an 85% required stable funding (RSF) factor and a 0% available stable funding factor under the Net Stable Funding Ratio (NSFR) rules. This is the same RSF factor as corn or lead and was only introduced with the last version of the rules in Basel III.

The above also demonstrates the somewhat inconsistent treatment of prudential regulation of gold, in particular when comparing its treatment under credit risk and eligibility as collateral versus its treatment for liquidity coverage purposes.

What are the timelines?

Most jurisdictions follow Basel implementation timetables, apart from the EU, UK and the US. The final Basel III rules, also known as Basel 3.1 and Basel III endgame, have been delayed consistently across these three major jurisdictions since the BCBS first proposed Basel 3 reforms following the global financial crisis. The EU has delayed some of the key reforms to January 2026. The UK has delayed implementation to 2027 and in the US, given the current political landscape which favours less regulation and heavy lobbying, the timetable is unclear.

Gold and HQLA: Correcting Misleading Online Information

There have been inaccurate reports online that gold will be reclassified as Tier 1 HQLA (High Quality Liquid Asset) under Basel III as of July 1, 2025. This information is not correct. Read more here.

www.lbma.org.uk

 

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...
Although gold is recognized as a Tier-1 asset under Basel III rules, it is still not accepted as a high-quality liquid asset (HQLA)—a key classification that the World Gold Council (WGC) seeks to change.

In its latest report, analysts at the World Gold Council recommend that the Basel Committee on Banking Supervision (BCBS) revisit gold’s classification and recognize it as an HQLA, citing the significant market volatility seen so far this year.
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More:

Gold performs as well as 30-year Treasuries, should be recognized as a High-Quality Liquid Asset - WGC

The Kitco News Team brings you the latest news, videos, analysis and opinions regarding Precious Metals, Crypto, Mining, World Markets and Global Economy.

www.kitco.com

WGC and LBMA aren't likely, IMO, to move the needle on this as the BCBS and BIS have a vested interest in maintaining the fiat currency status quo.

 

[pmbug]

I had an exchange with @Dioclet54046121 yesterday on this subject. I wasn't familiar with Andrew's commentary on the issue, but after learning about it, I re-read a recent report on the issue from @KitcoNewsNOW , and it was reported there clearly:

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Currently, Basel categorizes gold in different ways. Allocated gold held in bank vaults is considered a Tier-1 asset, enjoying the same recognition as cash. However, gold held as collateral among clearing houses is subject to a 20% reduction in book value.

Because it is not classified as an HQLA, unallocated gold is treated like other commodities and is subject to an 85% required stable funding (RSF) factor and a 0% available stable funding factor under the Net Stable Funding Ratio (NSFR) rules.
...

I think this clears up some of the mixed reporting I've been reading on the topic.