New banking rules, part of a sweeping international accord known as Basel III, will come into effect on Monday and mark a big change for European banks and their dealings with gold — potentially altering the landscape for precious metal demand and prices. Like many reforms put in place over the past decade that aim to avert another global financial crisis, the new banking rules come with some controversy — and caveats. Allocated gold, in tangible form, will essentially be classified as a zero-risk asset under the new rules, but unallocated or “paper” gold, which banks typically deal with the most, will not — meaning banks holding paper gold must also hold extra reserves against it.
In response to the global financial crisis of 2007 to 2009, the Basel Committee on Banking Supervision, which sets standards for regulation of banks, developed what is called Basel III. It’s defined by the Bank for International Settlements as an internationally agreed set of measures that aim to strengthen bank regulation, supervision and risk management. In its essence, Basel III is a multiyear regime change that aims to prevent another global banking crisis, by requiring banks to hold more stable assets and fewer ones deemed risky. Since physical gold will have a risk-free status, this could cause banks around the world to continue to buy more. Central banks already have stepped up purchases of physical gold to be held in the institutions’ vaults, and not held in unallocated, or paper form. Allocated gold is owned directly by an investor, in physical form, such as coins or bars. Unallocated gold, or paper contracts, often are owned by banks, but investors are entitled to that gold, and avoid storage and delivery fees. Under the new rules, paper gold would be classified as more risky than physical gold, and no longer counted as an asset equal to gold bars or coins.