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Basel III: Banks in London Approved to Apply for an Exemption

Apply for an Exemption
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EDITOR NOTE: If you’re a bank clearing trades in gold, your capital restrictions may be less severe than those that don’t, if you apply for an exemption. That’s what British regulators are telling their banks in the wake of Basel III implementation--an international accord designed to prevent a repeat of the 2008 financial crisis. The new rules attest to the stability of gold as a “near-riskless” Tier 1 asset. And as full implementation of Basel III draws near, the demand among banks to purchase gold for reserve will likely increase in the months leading up to its target date of January 2023. The introduction of rule changes, such as the one mentioned above, will likely be repeated among several banks across the globe in the months to follow. If you’re looking to accumulate the yellow metal to preserve your wealth or to seek growth, particularly in light of the global inflationary environment ahead, you don’t want to be in competition with other banks also trying to accumulate the metal for purposes of stable gold reserves. Now’s the time to purchase non-CUSIP gold, while it’s still well within its pullback range, and well before Basel III’s full implementation--when gold, in the international banking system, is once again considered the ultimate form of “money.”

Banks clearing gold trades in London can apply for an exemption from tighter capital rules due in January 2022, a British regulator said on Friday, removing what some said was a threat to the functioning of the market.

London is the world's biggest physical precious metals trading hub. Its clearing system, operated by a handful of large banks with access to metal in vaults - JPMorgan (JPM.N), HSBC (HSBA.L), ICBC Standard (601398.SS)(SBKJ.J) and UBS (UBSG.S) - settles gold transactions worth around $30 billion a day.

The upcoming rules, known as the net stable funding ratio (NSFR), are part of Basel III regulations designed to make banks more stable and prevent a repeat of the financial crisis of 2008-09.

The rules treat physically traded gold like any other commodity, requiring banks to hold more cash to match their gold exposure as a buffer against adverse price moves.

The London Bullion Market Association (LBMA), an industry body, has lobbied against them, saying they are unnecessary and could force some banks – including clearing banks - to stop trading.

Following a consultation, the Bank of England's Prudential Regulatory Authority (PRA) said on Friday it had "decided to amend its approach to precious metal holdings related to deposit-taking and clearing activities."

It said it had introduced an "interdependent precious metals permission" which would reduce the size of the required capital buffer.

"This is one of the key points that what we've been asking for all these years," said Sakhila Mirza, the LBMA's chief counsel. "Clearing will be exempt."

The PRA said it would not classify gold as a high-quality liquid asset, which would have freed other trades such as precious metals loans and leases from the high capital requirement.

The LBMA says gold is liquid enough not to need an additional liquidity buffer for clearing and settlement and short-term transactions.

JPMorgan and HSBC declined to comment. ICBC Standard did not immediately respond late on Friday.

A spokesperson for UBS said: "UBS welcomes the PRA's decision, which supports stability in bullion cleaning and avoids disruption to the London market."

Originally posted on Reuters

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