Gold under Basel III

GoldNRollGoldNRoll Posts: 211 Bronze ✭✭✭
Beginning this month, most of the regulatory parts of Basel III came into effect.

Do you think this will have an impact on the gold / dollar ratio?

There are are a few things I don't understand well, maybe someone can help.

In the new standards for credit risk, Gold is considered a zero-risk asset:

Page 32 of PDF:

A. Individual exposures
14. Other assets
95. The standard risk weight for all other assets will be 100%, with the exception of exposures
mentioned in paragraphs 96 and 97.
96. A 0% risk weight will apply to (i) cash owned and held at the bank or in transit; and (ii) gold bullion
held at the bank or held in another bank on an allocated basis, to the extent the gold bullion assets are
backed by gold bullion liabilities.
97. A 20% risk weight will apply to cash items in the process of collection.

Page 41 of PDF, by my understanding, says that a 20% floor will be applied for transactions where gold (between others) is used as collateral.

Does this means that 20% of the transaction must be collateralized, or that a 20% risk weight is applied to gold?

(ii) The simple approach
General requirements for the simple approach
146. Under the simple approach, the risk weight of the counterparty is replaced by the risk weight of
the collateral instrument collateralising or partially collateralising the exposure.
147. For collateral to be recognised in the simple approach, it must be pledged for at least the life of
the exposure and it must be marked to market and revalued with a minimum frequency of six months.
Those portions of exposures collateralised by the market value of recognised collateral receive the risk
weight applicable to the collateral instrument. The risk weight on the collateralised portion is subject to a
floor of 20% except under the conditions specified in paragraphs 150 to 154. The remainder of the
exposure must be assigned the risk weight appropriate to the counterparty. Maturity mismatches are not
allowed under the simple approach (see paragraphs 126 and 127).

Eligible financial collateral under the simple approach
148. The following collateral instruments are eligible for recognition in the simple approach:
(a) Cash (as well as certificates of deposit or comparable instruments issued by the lending bank) on
deposit with the bank that is incurring the counterparty exposure.69, 70
(b) Gold.
(c) etc...


154. The 20% floor for the risk weight on a collateralised transaction does not apply and a 0% risk
weight may be applied where the exposure and the collateral are denominated in the same currency, and
• the collateral is cash on deposit as defined in paragraph 148(a); or
• the collateral is in the form of sovereign/PSE securities eligible for a 0% risk weight, and its market
value has been discounted by 20%.

Same question for the comprehensive approach:

(iii) The comprehensive approach
(a) General requirements for the comprehensive approach
155. In the comprehensive approach, when taking collateral, banks must calculate their adjusted
exposure to a counterparty in order to take account of the risk mitigating effect of that collateral. Banks
must use the applicable supervisory haircuts to adjust both the amount of the exposure to the
counterparty and the value of any collateral received in support of that counterparty to take account of
possible future fluctuations in the value of either,72 as occasioned by market movements. Unless either
side of the transaction is cash or a zero haircut is applied, the volatility-adjusted exposure amount is higher
than the nominal exposure and the volatility-adjusted collateral value is lower than the nominal collateral

In all the cases, the haircut for gold is higher that high-graded bonds, and cash:
Main index equities (including convertible bonds) and gold 20
Issue rating for debt securities Residual maturity Sovereigns73 Other issuers74 Securitisation exposures75
AAA to AA–/A-1 ≤ 1 year 0.5 1 2
Cash in the same currency76 0

So I don't really understand where the 0% risk-weight for gold, as specified at page 32, is applied.

At page 130 of PDF, gold becomes a commodity with a risk weight of 20%:

(f) Commodity
73. For commodity delta and vega risks, buckets are defined as:

7 Precious metals (including gold) gold; silver; platinum; palladium

74. For commodity delta and vega risks, cross-bucket correlation bc γ = 20% for all cross-bucket pairs
that fall within bucket numbers 1 to 10.

On the other hand, we have the Minimum Capital Requirements document:

Here, at page 54 of the PDF, we have the same thing - gold is a commodity:

Commodity risk buckets, risk weights and correlations
21.81 For delta commodity risk, 11 buckets that group commodities by common characteristics are set
out in Table 11.
21.82 For calculating weighted sensitivities, the risk weights for each bucket are set out in Table 11:

7 Precious metals (including gold) Gold; silver; platinum; palladium 20%

So we have a risk weight of 20% for gold, again and despite the 0% at the beginning of the 1st document.

And then, at page 118:

Foreign exchange risk
40.53 This section sets out the simplified standardised approach for measuring the risk of holding or
taking positions in foreign currencies, including gold.[19]
[19] Gold is to be dealt with as an FX position rather than a commodity because its volatility is
more in line with foreign currencies and banks manage it in a similar manner to foreign

So just above, they said gold is a commodity with a risk weight of 20% and now they say gold is rather a FX position!
For the entire part about FX, gold is present:

Measuring the foreign exchange risk in a portfolio of foreign currency positions and gold

Moreover, at page 120 they clearly exclude gold from commodities risk:

Commodities risk
40.63 This section sets out the simplified standardised approach for measuring the risk of holding or
taking positions in commodities, including precious metals, but excluding gold (which is treated
as a foreign currency according to the methodology set out in [MAR40.53] to [MAR40.62] above).
A commodity is defined as a physical product which is or can be traded on a secondary market,
eg agricultural products, minerals (including oil) and precious metals.

Same for forward and options, gold is treated as FX:

(b) For options on equities and equity indices: the market value of the underlying
should be multiplied by 8%.[38]
(c) For FX and gold options: the market value of the underlying should be
multiplied by 8%.
(d) For options on commodities: the market value of the underlying should be
multiplied by 15%.


Basel III says 0% risk weight will apply to gold but then, it applies 20% haircut everywhere. Then it says gold is a commodity, then it says is a foreign currency.

Can someone illuminate me on this? :smile:


  • nienie Posts: 130 Bronze ✭✭✭
    Thanks for sharing your thoughts. Anyone with more insights?
  • SpontaneousOrderSpontaneousOrder Posts: 302 Bronze ✭✭✭
    Keith Weiner at Monetary Metals explains why Basil III is a nothing-burger: Will Basel III Send Gold to the Moon?
  • GoldNRollGoldNRoll Posts: 211 Bronze ✭✭✭
    @SpontaneousOrder Thank you for the link, very good information. Also difficult to digest after one read :smile:

    I should have add add the net stable funding ratio from Basel III to the post:

    So as a liability - that being what a bank owe to its creditors - gold is Tier 1 capital with 0% risk weight. I assume this applies when a bank uses gold as collateral for debts (including demand deposits).
    In practice, the 0% never applies. A haircut of 20% is applied on gold-capital in all cases. Gold is explicitly considered a capital of its own kind, a commodity like all precious metals and a foreign currency, making the entire regulation very fuzzy.

    On the asset side, gold has an RSF (required amount of stable funding) factor or 85%. I'm not sure which of the following is true?

    A) One needs 100 ounces of gold as collateral to take a loan of 15 ounces of gold equivalent in dollars.

    B) Gold needs a capital of 100 ounces of gold to give, on its base, a loan of 15 ounces of gold equivalent in dollars.

  • GoldNRollGoldNRoll Posts: 211 Bronze ✭✭✭
    B ) Banks needs a capital of 100 ounces of gold to give, on its base, a loan of 15 ounces of gold equivalent in dollars.
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