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Tough liquidity rules could push more banks out of gold - LBMA
October 19, 2015 / 3:58 PM / 2 years ago

Tough liquidity rules could push more banks out of gold - LBMA

* Basel III rules increase liquidity “haircut” to 85 pct

* Bullion banks could see costs up by as much as 300 pct

* Rules to be implemented by 2018

By Clara Denina

VIENNA, Oct 19 (Reuters) - New liquidity rules for banks in the European Union could raise costs for those trading gold by up to 300 percent, forcing them to withdraw from the market, the head of the London Bullion Association (LBMA) said.

Banks were found to be undercapitalised after the financial crisis began in 2007, forcing taxpayers to bail out many lenders and prompting the development of a global set of tougher rules known as 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,” LBMA Chief Executive Ruth Crowell told reporters at a conference in Vienna in Monday.

“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.

The LBMA has asked the European Banking Authority (EBA) to reconsider gold as a “high quality, liquid asset.”

“EBA said they will reflect their conversation with the precious metals industry in their final report to be published at the end of the year,” LBMA General Counsel Sakhila Mirza said. “Asking them to eliminate it altogether is not feasible, but bring it back to 50 percent, where it was.” (Additional reporting by Huw Jones in London; Editing by David Holmes)

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