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 per cent from 85 per cent.
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 per cent, 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.
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.