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.