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Early in 2011,
the London Bullion Market
Association began to push for gold to be recognised by the Basel Committee on Banking
Supervision as the ultimate high-quality liquid asset. It has been a planned approach involving the wider financial community, with the European Parliament voting unanimously to recommend that central counterparties (basically regulated settlement intermediaries for securities markets) accept gold as collateral under the European Market Infrastructure Regulation (EMIR). Lobbying by the LBMA certainly contributed to this favourable outcome. A growing acceptance of gold as collateral
in regulated markets is forcing the Basel Committee
to reconsider the position of gold as a banking asset, which currently has a 50% valuation haircut. It is now a racing
certainty the haircut will be revised
to zero, the same status as secure cash.
This is an important development for the physical
gold market, and early
warning of the change was signalled
by a consultation document issued by the Fed and banking regulators in the light
of forthcoming Basel 3 regulations1. It
must have stuck in the Fed’s
craw to have to circulate a proposal that “A bank holding company or savings and loan holding company may assign a risk-weighted asset amount of zero to cash owned and held in all offices
of subsidiary depository
institutions or in transit; and for gold bullion held in a subsidiary depository institution’s own vaults, or held in another depository institution’s vaults on an allocated basis,
to the extent the gold bullion
assets are offset by gold bullion
liabilities.”(Page 291 and elsewhere).
There can be
little doubt if history is any
guide that the US Treasury
and the Fed would rather
not give gold a status that rivals
the dollar, but they cannot
boss the Basel Committee around.
Ever since President Nixon took the dollar
off the gold standard, the official mantra has been that
gold no longer has any monetary role. To do an about-turn and accord it the same rank as dollar-cash is therefore extremely significant. Furthermore, there is an unarguable logic in favour of not penalising banks who wish to diversify
their balance sheets and collateral away from fiat currencies, some of which are becoming increasingly risky in these times of systemic stress.
The proposal is
only at the stage where comments are invited, but it is unlikely that
the banks will turn this proposal
down, since it represents a secure lending opportunity and the opportunity to diversify a bank’s own assets without facing a risk-weighting
penalty. The proposal when
implemented is certain to
encourage banks to buy
gold, and the bullion banks
in London will hedge uncovered unallocated customer liabilities. And what is sauce for the
commercial goose is also sauce for the central-bank
gander: it makes no sense for the central banks to continue to marginalise gold on their own balance sheets. Instead, central banks should abandon the myth of valuing gold on their books at $42.22 and treat it as a proper monetary asset.
What this proposal amounts to is no less than
the official remonetisation of gold. And as the
implications dawn upon
the wider banking community we shall see increasing
numbers of banks seeking gold-related lending opportunities and more
and more bankers seeking
to acquire it as a core balance sheet asset.
Originally published
at Goldmoney here
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