Europe eases liquidity requirements for gold

The European Parliament has given its assent to a Easing of liquidity requirements for banks that trade gold, Reuters reports. New rules for the banking sector that will come into force from 2020 would place gold in the same category as other commodities, which would mean that smelters and banks trading the precious metal would have to hold much more reserves for it.

The LBMA felt that these rules were too strict and started a campaign to convince the European Parliament to relax these rules. According to Sakhila Mirza of the LBMA, it took more than a year to convince parliament that gold needs a smaller liquidity buffer than other commodities. With success, because instead of 85%, banks and smelters only have to maintain a 50% buffer for their precious metal.

"This reduction from 85% to 50% is a lifeline, but what we really want is 0% for handling short-term transactions in precious metals. We have been successful, but the work is not done"Mirza told Reuters. She expects that even the relaxed liquidity requirement of 50% will mean that a number of parties will have to exit the market.

Lower liquidity requirements for gold

The LBMA has previously said that the new rules could increase the cost of trading gold between banks by 300% and make it harder for smelters to get funding. Now that the liquidity requirement has been reduced from 85% to 50%, the impact on the sector is less drastic, but still detrimental. According to the LBMA, gold is a highly liquid instrument that can be traded at any time and therefore there is no reason to maintain an additional liquidity buffer for the precious metal.

The LBMA expects that the stricter liquidity requirements for gold will cause some banks to stop trading gold gold, while others will pass on the higher costs to smelters, which usually have to pre-finance their gold stockpiles. According to Mirza, the fact that the European Parliament has finally agreed to a relaxation of the rules is an acknowledgement of the fact that the original rules were not appropriate and that there is still more room for negotiation.

This contribution was made from Geotrendlines