Basel III rule by Britain exempts gold clearing banks
As a British regulator, banks clearing gold trades based in London can register for exemption from tighter capital rules due in January 2022. As per some people the rule was a threat to the market functioning.
London is the world’s biggest gold trading centre. Large banks such as JP Morgan, HSBC, IBC Standard and USBC operate the clearing system with admittance to gold in vaults, and nearly $30 billion worth of gold is transacted by them every day.
A part of the Basel III rule, the net stable funding ratio (NSFR) is formulated to avoid a financial crisis that happened in 2008-09 and make banks more stable.
As per the rules, physically traded gold is treated like any other commodity that causes banks to hold more cash to match their gold vulnerability as a cushion against the untimely moving prices.
An industrial body, The London Bullion Market Association (LBMA), have argued that are rules are not needed and can result in some banks, including clearing banks, not trading anymore.
On Friday, The Bank of England’s Prudential Regulatory Authority (PRA), based on a consultation, stated that the approach to precious metal holdings related to deposit-taking and clearing activities would be amended.
An interdependent precious metals permission was introduced that reduced the required capital buffer size. Gold would not be classified as a high-quality asset by the PRA as that would release other trades such as precious metals loans and leases from the high capital necessity.
As per the LMBA, gold would not need an extra liquidity cushion for clearing and settlement and short-term dealings as it is liquid enough already.