As noted by Reuters, new liquidity rules for banks in the EU could raise costs for trading gold by up to 300%. Consequently, banks will be forced out of the market, according to London Bullion Association (LBMA).
After the financial crisis, new capitalization rules were introduced in the context of Basel III. The rules treat physically traded gold the same as other commodities, meaning banks trading the metal would have to carry more cash and cash equivalents as a proportion of their gold exposures to act as a buffer if there is an adverse move in the gold price.
In Basel III’s language, gold’s liquidity “haircut” is increasing to 85 percent from 50 percent. This percentage is used to help calculate a so-called liquidity buffer known as the net stable funding ratio (NSFR) that all banks must hold from 2018. The higher the figure, the more funding is needed to meet the overall NSFR requirement.
This, the LBMA and other industry bodies argue, makes funding gold transactions for commercial banks difficult and increases the cost of doing business.
“Basel III is a big issue for us at the moment, because we are looking at an increase in costs of up to 300 percent and … that is a kind of cost that makes you decide to get out of the business,” said LBMA’s CEO Ruth Crowell. “And whilst there is not a lot of sympathy for banks, it’s the clients of these banks that are going to suffer from that, producers, manufacturers, refiners.”
The rules come into full force in 2019, but regulatory and market pressure has prompted lenders to comply sooner.