Gold to be Declared Tier 1 Asset Under New Basel III Rules

The new Basel III rules are set to make gold a Tier 1 asset for commercial banks- compared to the Tier 3 ranking it holds currently.  This means PHYSICAL gold will count as capital the same as a treasury bond.
Demand for physical metal will increase substantially from this ruling, but you won’t hear it mentioned on CNBC.

The big new thing in gold – capital adequacy ratios

Ross Norman looks at the implications for gold of an increased focus on the assets banks are allowed to hold as tier one capital.

LONDON (SHARPS PIXLEY) - Forgive the hyperbole in the headline but we wanted to get your attention as something quite profound is happening that could propel gold to record new highs. Yes, potentially the biggest thing since the birth of the gold ETF and the liberalization of the Chinese gold market in 2003. A decade on and we have grounds for saying that gold may well see a significant leg higher… the big new thing in gold. I’ll explain…

Banking capital adequacy ratios, once the domain of banking specialists are set to become centre stage for the gold market as well as the wider economy. In response to the global banking crisis the rules are to be tightened in terms of the assets that banks must hold and this is potentially going to very much favor gold. The Basel Committee for Bank Supervision (or BCBS) as part of the BIS are arguably the highest authority in banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules.

 

In short, they are meeting to consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than a Tier 3 asset with just a 50% risk weighting as it does today. At the same time they are set to increase the amount of capital banks must set aside as well. A double win potentially.

 

Hitherto banks have been much dis-incentivised to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which have fared too well in the crisis. With this potential change in capital adequacy requirements. bank purchases of gold would drive up its value relative to other high quality qualifying assets, increasing its desirability for regulatory purposes further. This should result in gold being re-priced to bring it on a par with all other high quality assets. 

 

Currently banks have to have core Tier 1 capital ratio of 4% of which will rise to 6% from the beginning of next year. In addition to its store of value merits, central to the argument in favor of gold as a bank reserve is its countercyclical nature to most other assets in that it tends to be inversely correlated. Gold is ideal as it bears no credit risk. it involves no other counter-party and it is no one’s liability. It is a reserve asset diversifier if you like. 

 

This is a treble win for gold – it would be a major endorsement of its role in preserving wealth and as a store of value from the highest financial authority, it would lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of its value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger.
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Comments

  1. But, but, but…. Gold is not money!

    LMAO again and again.
  2. Don’t be too quick to label this as bullish for gold.  I expect that we’re not talking about physical gold in the banks sole possession.  We may see banks doubling down on their gold hypothecation strategies, thus keeping a lid on rising gold prices.  

  3. This is true, however, if (big if), the MSM starts reporting on this, it be the time when the public starts to “protect” their own assets buy jumping on the train in both physical and paper PM’s. We shall see. In the mean time, stack while it’s cheap and take no chances.

  4. Uglydog…I believe I read somewhere yesterday that it actually has to be physical gold in the bank’s possession.  I’ll try and hunt down the article I read.

  5. Here it is:  http://truthingold.blogspot.com/2012/05/gold-isnt-for-goldbugs-anymore.html

    From the article:

    One reason is that the B.I.S. – Bank for International Settlements, the Central Bank for all global Central Banks – is looking into reclassifying gold as a Tier 1 asset: LINK What this means in short is that it would elevate gold held by banks to the same asset class status as paper currency. In other words, “gold is cash.” Currently gold is classified as Tier 3 asset, which means that any gold held by a bank gets a 50% haircut to market value in accounting for a bank’s required capital reserves held against liabilities. Tier 1 status would elevate gold to 100%, same as cash. Hmmm…

    What this means is that banks/Central Banks which own and hold physical gold (not GLD, mind you) would be incentivized to see the price of gold go a lot higher. This would put the big accumulators (China, Russia, India, Gulf States, South America/Mexico) in direct conflict with the big manipulators (Fed, Bank of England, ECB). This could get interesting. 

  6. Thanks for the link Bull Lion. “Gold is Cash”. That’s got to be enough to make Buffet cry.

  7. can you fit that dog in on your new American zombie state flag?…like maybe next to some fascist symbols and a picture of a printing press?

  8.  judging on Mark Dice’s latest failed attempt to basically give away a gold coin most people wouldn’t mind the new flag…esp if they got to be shown on TV or give them a free microphone lol

  9. That’s one positive article if it actully happens but which banks have the PHYSICAL does JP Morgan have it? Does the FED have it? It’s going to be a very interesting outcome if they decide to go that way then try to find their gold. LMAO

    Do You Have Any Jamie

  10. M45 what they do not have they will need to go on the open market

  11. Remember we are talking about banksters here.  They’re not looking out for the little guy.  Their agenda is about control and creating wealth for themselves.  The devil will be in the details on this one.  Just how do you define “possession”?  We all initially thought the GLD was legit.  But, the fine print in their prospectus revealed otherwise.  Currently banks are allowed to count leased gold and gold in the vault as the same thing.  Hard for me to believe that they would force proper accounting of who actually owns the physical gold at this stage.

  12. Funny as s*#t M45. Let them have their flag All Metal. I’ve got mine and the colors don’t run! All I can say is “if you don’thold it” ya’ll know the rest. They can lease all they want but mine, they have no control over.

  13. Too bad that Warren Buffet never bothered to read or understand his father’s (Howard Buffet’s) speech on the real meaning of the gold standard and how important it was to maintaining personal liberty.  :-/

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