Gold’s Reclassification in the Global Financial Landscape - Basel III

In 1974, The BCBS or the Basel Committee on Banking Supervision was established by the central banks of the G10 (Group of 10) countries, in response to instability in global financial markets. It was set up as a forum for member nations to discuss supervision of the banking industry - focusing on improving banking regulation - with the aim of helping maintain global financial stability.

The BCBS expanded in 2009, after the GFC, from 10 to 28 jurisdictions - which include the United States, Canada, Germany, United Kingdom, Australia, Russia, India, China, Hong Kong, Singapore, Japan, Korea, Indonesia, France, The Netherlands, Italy, Spain, Luxembourg, Belgium, Sweden, Turkey, Saudi Arabia, Switzerland, Argentina, Mexico, South Africa and Brazil. 

Around the same time - Basel III was introduced - as a set of global banking regulations designed to prevent banks from taking on too much risk, increase their resilience to stressful financial conditions, and improve overall transparency. Basel III builds on Basel I and Basel II - an ongoing effort to improve regulation in the banking industry - with a large part of Basel III relating to bank capital buffers. In relation to Gold - it targets reducing speculation in financial products with Gold as the underlying asset. 

One of the key changes with Basel III is the reclassification of physical gold from a Tier 3 asset to a Tier 1 asset with a 0% risk weighting, similar to cash and government bonds. With physical gold now being held on par with cash - It's considered a liquid, zero-risk asset that counts towards a bank's allocation. It also requires financial institutions to hold capital buffers of 85% (previously 0%) to secure precious metals financing and clearing transactions.

This reclassification of physical gold in the global financial landscape, raises speculation around the possible increase in demand for physical gold as collateral, moving forward. 1:1 gold-backed products which provide an element of ease and flexibility - on top of the security and pristine collateral value of physical gold - might find themselves in an intersection of demand, previously unseen. 

The reclassification of physical gold in Basel III has set into legislation, the eternally understood value proposition of physical gold - as an elite global safe haven asset - with the ramifications of this on gold markets and the global financial system unfolding in real-time.