On March 29 physical gold becomes a tier 1 bank capital asset (money) again

[devil21]

Same category of asset as cash and bonds. But real, not paper or digits. It explains all of the gold looting that's been going on in recent years, among other gold moves.

https://www.zerohedge.com/news/2019-...-becomes-money

[devil21]

Since this news item came out I've been seeing posts and comments around the net indicating that it's fake news as Basel III doesn't even take effect until 2022. So, like ya do, I looked deeper and it seems that the 2022 thing is a bs claim.

From the Financial Stability Board's own website, an official chart of status of various levels of implementation of Basel III reforms as of late 2018. Most of them are target date 2019, including the Risk Based Capital changes that this thread and news item is based on. It's interesting to note who HASN'T completed the reforms yet and it happens to be the countries we are seeing in the news a lot lately (UK, Italy, France, etc)

http://www.fsb.org/wp-content/uploads/P281118-2.pdf

[Zippyjuan]

https://www.cumber.com/capital-stand...d/?print=print

So here are the facts. First, under the current Basel III proposed rules (see http://www.bis.org/publ/bcbs188.pdf ), gold is
currently not assigned a risk weight for the purposes of assessing bank capital adequacy. Gold only figures into the
calculation of the required net stable funding ratio, which is part of the Basel III liquidity standards, not the capital
standards. Under the net stable funding rules, a bank would have to maintain the ratio of available stable funding to the
required amount of stable funding at greater than 100%. Different liabilities count towards the definition of available stable
funding. For example, Tier 1 and Tier 2 capital, long-term debt, and deposits with maturities greater than one year are
regarded as 100% stable, retail deposits with maturities of less than a year are regarded as 85% stable, and so on down to
wholesale funding, which is regarded as only 50% stable. Some liabilities are even given zero as a stability weight.

Now, if the proposal is to move gold from its present 50% weight category to 100%, that raises the amount of stable funding
needed to support gold holdings and presumably ups the costs of holding gold. Therefore, those arguing that the proposed
changes (if they are indeed proposed changes) will increase the demand for gold and be bullish for gold valuations, have it
backwards. Any change that increases the stable funding ratio will increase the cost of carrying that asset, while any
proposal that lowers the net stable funding ratio will be bullish for the asset.

We have not, as of this writing, been able to verify what proposals are being considered, or even if they are. However, we
do know that gold does not figure into current or proposed bank capital standards, as some have suggested. Nor would
increasing the stable funding requirement for gold be bullish for that asset.

[Zippyjuan]

https://www.investopedia.com/ask/ans...-2-capital.asp

Tier 1 Capital vs. Tier 2 Capital: An Overview

Under the Basel Accord, a bank has to maintain a certain level of cash or liquid assets as a ratio of its risk-weighted assets. This is known as the capital adequacy ratio (CAR). Under Basel III, a bank's tier 1 and tier 2 assets must be at least 10.5% of its risk-weighted assets, up from 8% under Basel II.

A bank's capital consists of tier 1 capital and tier 2 capital, and the two types of capital are different (there is a third type, called tier 3 capital, conveniently enough). Tier 1 capital is a bank's core capital, whereas tier 2 capital is a bank's supplementary capital. A bank's total capital is calculated by adding its tier 1 and tier 2 capital together. Regulators use the capital ratio to determine and rank a bank's capital adequacy.


Tier 1 Capital

Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations. Tier 1 capital is the primary funding source of the bank. Typically, it holds nearly all of the bank's accumulated funds. These funds are generated specifically to support banks when losses are absorbed so that regular business functions do not have to be shut down.

Under Basel III, the minimum tier 1 capital ratio is 10.5%, which is calculated by dividing the bank's tier 1 capital by its total risk-based assets. For example, assume there is a bank with tier 1 capital of $176.263 billion and risk-weighted assets worth $1.243 trillion. So, the bank's tier 1 capital ratio for the period was $176.263 billion / $1.243 trillion = 14.18%, which met the minimum Basel III requirement of 10.5%.

Tier 2 Capital

Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves. Tier 2 capital is supplementary capital because it is less reliable than tier 1 capital. Tier 2 capital is considered less reliable than Tier 1 capital because it is more difficult to accurately calculate and is composed of assets that are more difficult to liquidate.

In 2019, under Basel III, the minimum total capital ratio is 12.9%, which indicates the minimum tier 2 capital ratio is 2%, as opposed to 10.9% for the tier 1 capital ratio. Assume that same bank reported tier 2 capital of $32.526 billion. Its tier 2 capital ratio for the quarter was $32.526 billion / $1.243 trillion = 2.62%. Thus, its total capital ratio was 16.8%(14.18% + 2.62%). Under Basel III, the bank met the minimum total capital ratio of 12.9%.

Key Takeaways:
Under Basel III, a bank's tier 1 and tier 2 assets must be at least 10.5% of its risk-weighted assets, up from 8% under Basel II.
Tier 1 capital is the primary funding source of the bank.
Tier 1 capital consists of shareholders' equity and retained earnings.
Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves.
Tier 2 capital is considered less reliable than Tier 1 capital because it is more difficult to accurately calculate and more difficult to liquidate.

[devil21]

https://www.cumber.com/capital-stand...d/?print=print

Those links are about 8-10 years old and even refer to them as "proposed" rules and "draft" proposals, which implies they were not complete or final at the time of the writing. The BIS even says that linked document was replaced with a later edition. If you have info directly from the FSB and/or BIS showing the FINAL specifics, please do share.

Regarding the cumber.com item, whether the impact is bullish for gold prices or not is irrelevant and my post never said it was. It simply claims that gold returns to status as money, which is important seeing how this is RonPaulForums and sound money is a big deal around here. There is obviously a grab for gold going on for some important reason...

Can we at least agree that the 2022 timeline being floated in response to this news item is bs?

[Zippyjuan]

Those links are about 8-10 years old and even refer to them as "proposed" rules and "draft" proposals, which implies they were not complete or final at the time of the writing. The BIS even says that linked document was replaced with a later edition. If you have info directly from the FSB and/or BIS showing the FINAL specifics, please do share.

Regarding the cumber.com item, whether the impact is bullish for gold prices or not is irrelevant and my post never said it was. It simply claims that gold returns to status as money, which is important seeing how this is RonPaulForums and sound money is a big deal around here. There is obviously a grab for gold going on for some important reason...

Can we at least agree that the 2022 timeline being floated in response to this news item is bs?

From the Investopedia link:

Updated Mar 24, 2019

though you are right about the first one. At the top I missed the link to an updated version https://www.bis.org/publ/bcbs238.htm

-full text is 75 pages so for now I will go by the Investopedia summary of what a Tier One capital consists of. Gold is not listed. I cannot confirm anything about 2022 though Wiki says:

Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 31 March 2019 and then again until 1 January 2022

https://en.wikipedia.org/wiki/Basel_III

Wiki also says nothing about gold being added as a Tier One asset. That claim is the part which seems to be the myth.

https://en.wikipedia.org/wiki/Tier_1_capital

Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital,[1] which consists primarily of common stock and disclosed reserves (or retained earnings),[2] but may also include non-redeemable non-cumulative preferred stock. The Basel Committee also observed that banks have used innovative instruments over the years to generate Tier 1 capital; these are subject to stringent conditions and are limited to a maximum of 15% of total Tier 1 capital. This part of the Tier 1 capital will be phased out during the implementation of Basel III.

[Bern]

I tried to follow this very confusing story over here: https://www.pmbug.com/forum/f2/basel...1-status-1056/

Best as I understand it, the original Basel III plan did propose to move gold to tier I with zero risk (equivalent to government bonds as a bank asset). This was confirmed by the FDIC in June 2012 (post #14 in link above).

In August 2013, I learned that the BIS had changed the Basel III plan (post #38 in link above) with respect to gold.

A lot of the reporting on this issue is confusing as it seems a lot of reports - even ones published today - are discussing the gold moving to tier 1 status and that hasn't been true for years. I don't think a lot of peeps on the internets are digging to the source material (BIS) before reporting on this.

[devil21]

I guess we'll just have to place our bets and watch it play out. There absolutely is too much confusion and conflicting information out there to make a definitive case either way. Having said that, the BIS isn't the most transparent of organizations, as they make it policy to suppress information on pretty much all of their gold activities, as the central bank of central banks. Suppressing such a major move as gold being returned to official money status, until the last possible moment, wouldn't be outside of the realm of possibilities, either. I'm still pretty certain that gold is returning to a monetary status but YMMV.

[Bern]

I think I've got a better handle on the issue now. The best article I've found on the subject explains:

...

Gold under Basel II rules was treated as either Tier 1 or Tier 3 capital, since the BCBS stipulated that “at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.”

Basel III rules abolished the Tier 3 capital class, and all assets fell under either Tier 1 or Tier 2 capital. In Basel III, gold’s liquidity haircut is increasing to 85% from 50%. 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 NSFR, the more funding is needed to meet the overall NSFR requirement.

However, the announcement of the US Federal Deposit Insurance Corporation (FDIC) made on June 18, 2012 and adopted on August 30, 2012 states that “A zero percent risk weight to cash owned and held in all of a banking organization’s offices or in transit; gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis to the extent gold bullion assets are offset by gold bullion liabilities.” So gold was considered riskless in the US under Basel II rules and recommendations, and it will remain this way under Basel III provisions. The announcement also states that “the final rule defines financial collateral as collateral in the form of: (1) Cash on deposit with the banking organization (including cash held for the banking organization by a third-party custodian or trustee); (2) gold bullion; …”.

The European Commission did not automatically consider gold a riskless asset, but charged the European Banking Authority (EBA) with the task of identifying which assets are to be legally deemed riskless. However, the European Parliament expressly pointed to gold as a highly liquid asset that should be taken into consideration by the EBA. The EBA, in its report of December 2013 on appropriate uniform definitions of extremely high quality liquid assets (Extremely HQLA) and high quality liquid assets (HQLA) and on operational requirements for liquid assets, states that “neither equities or gold were found to qualify as assets of high liquidity and credit quality as they failed on the price volatility criteria.”
...

http://bmg-group.com/gold-zero-risk-monetary-asset/


This report from late January seems to confirm that the LBMA is worried about a liquidity crisis in the London gold trading if the NSFR has to apply to European banks that trade on their platform:

European finance ministers have rejected a proposal to ease new liquidity rules for banks trading gold, the London Bullion Market Association (LBMA) said.

The industry says the planned rules could force some players out of the market. Due to take effect in the European Union around 2022, they form part of regulations known as Basel III designed to make banks more stable and prevent a repeat of the financial crisis a decade ago.

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 LBMA says they are unnecessary, costly and would disrupt London’s bullion clearing system, which settles gold transactions worth around $23 billion a day.

EU finance ministers rejected a proposal by the European Parliament to lower the percentage used to calculate the liquidity buffer that banks must hold to 50 percent from 85 percent.

Instead, the European Banking Authority (EBA) will examine whether to lower the percentage or exempt precious metals from the buffer, known as the net stable funding ratio (NSFR), the LBMA and the European Council said.

“We are still optimistic,” said the LBMA’s general counsel, Sakhila Mirza. “While we were hoping for that 50 percent, ultimately our aim has always been getting an exemption.”

The LBMA, whose members include major gold refiners and bullion-trading banks, says gold is liquid enough not to need an additional liquidity buffer for clearing and settlement and short-term transactions.

It says the rules could mean a number of banks stop trading or settling gold, curtailing market liquidity. London is one of the world’s biggest bullion markets.

Mirza said the review was likely to last two years. The EBA will then make recommendations which would have to be approved by the European Commission, parliament and council of ministers.

She said the LBMA was preparing to lobby the EBA and that data the LBMA began publishing last year showing for the first time how much gold and silver trades in London each day would help convince the EBA of the need for an exemption.

While Britain plans to leave the European Union this year, the EU’s approach is likely to inform how Britain applies the Basel III requirements.

A European Council official said the EBA had been tasked with reviewing the NSFR requirements for precious metals and did not comment further.

https://www.reuters.com/article/us-g...-idUSKCN1PI12A