Unallocated Gold An Essential Source Of Liquidity??10 Jun 2021 17:13
As Basel III comes into force, we look at the impact of the Net Stable Funding Ratio (NSFR)
There has been much debate about the implications of Basel III on the bullion industry. What is clear is that the under the current rules the cost to banks of holding gold on balance sheet will increase – the NSFR requires 85% of required stable funding.
This is punitive and does not acknowledge the highly liquid nature of gold, and the way gold is often transacted as a currency.
The World Gold Council and London Bullion Market Association recently wrote to the Prudential Regulatory Authority (PRA) setting out our concerns about the NSFR and the 85% Required Stable Funding (RSF) in particular:
- The current clearing and settlement system would be undermined – the increased costs may make participation in the clearing and settlement regime commercially unviable, potentially leading to some banks existing the system.
- Liquidity could be drained – the cost of taking on gold deposits as unallocated gold would increase compared to the cost of custody services for allocated gold. **Unallocated gold is an essential source of liquidity for the effective functioning of the clearing and settlement system.
-Financing costs would increase – stable funding costs could be passed through to non-bank market participants such as miners, refiners and manufacturers using gold.
-Central bank operations would be curbed – the clearing banks facilitate gold deposit, lending and swaps operations; essential sources of market liquidity.
Allocated vs. Unallocated Gold
There has been much speculation about the impact of the NSFR on the allocated and unallocated gold markets. Some commentators have noted that allocated gold can be considered a tier 1 asset and therefore receives a risk weighting of zero. **This is nothing new. Gold held in own vaults or on an allocated basis has always been a tier 1 asset under the Basel Accords. This is because allocated gold attracts no credit risk – it is neither the asset or liability of the custodian bullion bank and is therefore not considered part of the custodian bank’s balance sheet.
So, whilst Basel III does not materially change the treatment of allocated gold, it does increase the costs of holding unallocated gold. But does this mean the unallocated gold market will disappear? No it won’t, but the costs of holding unallocated gold will go up. Unallocated gold is an essential source of market liquidity. The clearing and settlement regime depends on it, and without an unallocated gold market it will be very difficult to finance (and facilitate) the upstream activities of gold producers and refiners, and the downstream users such as jewellers. The real economy demand for gold relies on the unallocated gold market. So whilst the funding cost of unallocated gold will increase, we are unlikely to see a major distortion in favour of allocated metal
https://www.gold.org/goldhub/gold-focus/2021/06/basel-iii-and-g
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