A triumvirate of US bank regulators has rolled out for comment proposed rules for bank capital and market risk rules. This is all in preparation for Basel III and the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Most of the gobbledygook isn’t very interesting. But at a few places in the document it lists changes to the risk-ratings for various assets banks may hold or take as collateral for loans. The proposed list of the zero-risk stuff a bank can hold is as follows,
Cash; Gold bullion; Direct and unconditional claims on the U.S. government, its central bank, or a U.S. government agency; Exposures unconditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency; Claims on certain supranational entities (such as the International Monetary Fund) and certain multilateral development banking organization; Claims on and exposures unconditionally guaranteed by sovereign entities that meet certain criteria (as discussed below).
These assets are proposed to have a zero percent risk rating. As opposed to say Claims on government sponsored entities (GSEs); claims guaranteed by state and local governments; or claims on U.S. depository institutions and NCUA-insured credit unions which are proposed to have a 20 percent risk rating.
Fifty (50) percent risk-weighted exposures include pre-sold residential construction loans and
Claims on and exposures guaranteed by sovereign entities, foreign banks, and foreign public sector entities that meet certain criteria.
Currently gold bullion is risk weighted at 50 percent. In other words, a 50% haircut is taken on its current value for capital adequacy calculations. This becomes a big deal when Basel rules require banks to maintain an 8 percent ratio to risk-based capital. Bankers want to maintain as little capital as possible since leverage is the name of the game in the banking business.
These rules will push banks out of the real estate lending business and into to the taking deposits and buying U.S. government bonds business. Since construction loans on pre-sold residential units will have a 50 percent risk-weighting a bank with a portfolio of these loans would need to maintain double the amount of capital as a bank with a portfolio of government bonds. Or gold bullion loans.
In my experience, bankers and their regulators don’t know how to even spell gold, let alone understand its historical importance as a store of value and liquidity. For these types, to put the yellow metal in the same risk-based class as government created cash and government bonds is quite simply amazing. It’s a sea-change in thinking at the bureaucratic level.
It’s hard to imagine banks buying up gold bullion for their portfolios. Although shiny and solid, the yellow metal won’t help a banker at all in paying the help and interest to CD holders.
And how many bankers are making loans secured by gold? J.P. Morgan for one. In February of last year, JPM announced it was accepting gold as collateral for loans. The Business Insider reported at the time,
By reopening its former gold vaults in New York, as well as new facilities in Far Eastern financial centers – which cater to investors who typically have larger gold reserves than Western counterparts – Morgan is telling the world that gold is gaining greater traction as a medium of exchange.
A risk-rating of zero will make J.P. Morgan’s gold lending much more profitable. Not to mention that J.P. Morgan Chase is one of only six banks on The London Bullion Market Association handling gold loan transactions. Not that the regulators would change the rules just to help Jamie Dimon. Although he does sit on the board of the New York Federal Reserve, one of the three agencies proposing the rule change.