If you regularly follow the role of gold in the financial marketplace, you might have noticed that banks have been buying more and more gold this year. The reasons for this are numerous and complex, but it seems like there’s a link between the higher rates of buying gold and the Basel III implementation, which was set for March 31, 2019.
If you’re interested in gold investing, it’s a good idea to build confidence in your understanding of what’s happening with western banks. Read on for a breakdown on Basel III.
What Is Basel III?
Basel III provides banks with a set of reforms that were designed to help regulate banks and provide risk management help. It stems from the Basel Committee on Banking Supervision, and it’s a voluntary framework that many countries around the world have adopted.
There were previously two other versions of the accords—Basel I and Basel II—but this current installment developed as a response to the risky behaviors of banks that helped lead to the 2008 financial crisis. Though the Basel III standards were developed as far back as 2010, the implementation was continuously delayed until March 2019.
Basel III is a complicated set of requirements, but the basic idea is that banks are urged to maintain capital requirements that will help them avoid insolvency. Banks that overstretch their investments run the risk of defaulting, which could spell financial disaster for the bank as well as the public.
The minimum capital requirements often rise following financial crises, and that was true of Basel I, which said that internationally active commercial banks must increase capital requirements from 5.5 percent to 8 percent of total assets. However, the banks had some leeway. All assets are given a risk rating that differs based on the type of asset. Loans may have a weight of 1, while short-term government securities are given a weight of 0. Basel III has made it a bit more difficult to manipulate assets and thus lower capital requirements.
How Does Gold Fit In?
Because of the Basel III requirements, banks that expand their assets will clearly need to expand their capital. However, interestingly, gold is not counted against capital because it holds a low risk rating. This means that banks can collect gold in their vaults without it affecting their capital requirements. People speculate that banks are now buying gold quickly because it’s a way to build up their reserves without being penalized.
With this uptick in gold, you might be interested in gold investing. If so, you’ll need the help of a trusted advisor to make sure your money works for you. Gold Wealth Financial has the backing of Investopedia, and we want to use our vast experience to help you make smart, forward-thinking investments in gold and other precious metals—and know when and how to sell them as well. Call today to set up an appointment that will secure your financial future. We look forward to working with you soon!
- by Steve Hunt
Categorised in: Gold Investing