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Metal | Ounce | Gram |
Gold | £0.00 | £0.00 |
Silver | £0.00 | £0.00 |
Metal | Ounce | Gram |
Gold | $0.00 | $0.00 |
Silver | $0.00 | $0.00 |
Metal | Ounce | Gram |
Gold | €0.00 | €0.00 |
Silver | €0.00 | €0.00 |
European banks are undergoing a big change in how they deal with gold under new regulations that have come into effect in Europe. A new international Accord known as Basel III has the potential to change the landscape for gold and other precious metals.
Under the new rules, physical gold will be essentially reclassified as a zero-risk asset, moving from a tier 3 asset to a tier 1.
The bank's usual method for underwriting, paper gold, will not be reclassified, however. This has the potential to force banks to either take on more paper gold as a reserve or switch to physical gold.
Basel III is a direct response to the global financial crisis of 2007 to 2009 and is a multi-year regime change with the aim of preventing another banking crisis from occurring.
The Basel Committee on Banking Supervision, which sets the standards for banks, believes that their measures for requiring banks to hold more stable assets, like gold bullion, will help maintain stability within the banking system during turbulent times.
Central European banks have already made a conscious move toward physical gold over the last few years, and these new rules could continue that move in earnest.
Physical gold, such as bars and coins, has the advantage of being owned by the investors outright and kept physically in their position. This advantage is why Basel III has changed its asset classification to zero-risk.
Liquidity Requirements
The Basel III reforms also bring with them new liquidity requirements for European banks known as the Net Stable Funding Ratio (NSFR). The new requirements state that the amount of available stable funding relative to the amount of required stable funding must be equal to at least 100% on an ongoing basis.
These changes came into place for European banks on June 28th, in the U.S. on July 1st, and will come into place from January 1st, 2022 in the UK.
According to the London Bullion Market Association (LBMA) the aim of the NSFR, in particular, is to “oblige banks to finance long term assets with long term money”, and that “assets are properly funded”.
While these new rules may mean that banks purchasing of gold will increase, some don’t see this move as being bullish for gold.
Unallocated Gold
The new NSFR rules make it much more expensive for banks to hold unallocated gold as they will now have to be included on the bank's balance sheets.
This could be a significant blow as unallocated gold was the preferred method for banks to trade as it is a much quicker, cheaper, and more effective way to trade rather than having to transport physical bars back and forth.
There are some that worry this will make the dealing of gold far more expensive and actually reduce the amount it is traded and thus less of an investable asset.
Gold Market Impact
The majority of the gold trading takes place in the London bullion market, and as the rules don’t come into force until January 2022 the actual impact on the gold market remains to be seen.
That hasn’t stop speculative thought ranging from it will have no effect to it will cause absolute mayhem among various experts.
The underlying belief is that it is unlikely the bullion market or the banks will allow these regulations to have too much of an impact on the market, and the price of gold will continue on a steady course, though the cost of dealing will likely rise.
Disclaimer: This is not financial advice.
Last updated: November 27, 2020
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