NZ banking and gold

Will NZ Banks Buy Gold?

Gold Survival Guide,

21 November, 2012

In the article on the RBNZ’s OBR, we also touched on how the new BASEL III banking rules will impact NZ banks. Namely that the “minimum for total capital is 8% of risk-weighted assets (RWA) comprising: common equity tier 1 at 4.5%; total tier 1 of 6% and total capital at 8%. “  

The important point here is that total tier 1 capital must be 6%.  This is a rise from the current 4% requirement. Tier 1 assets currently include cash and certain government bonds. But you may have also heard that gold will also be moved from the tier 3 to the tier 1 list when the new rules come into force. This means gold can be valued at 100% of it’s market value not the current 50%. We first mentioned this in June of last year “Instead of negative could it be positive news that sends gold on its next leg up”.

As Frank Holmes indicated in that original article, this re-rating of gold in his opinion could lead to much more buying of gold and gold shares. 

The RBNZ intends to implement BASEL III, so this got us wondering yet again, “Will NZ banks or the reserve bank buy gold to bolster their balance sheets?” We still have serious doubts, especially given responses from the RBNZ in the past that “Gold is not liquid enough for them”.

So we'd say it's highly unlikely that the RBNZ will be adding to it’s current gold holdings of zero ounces. What about NZ banks? According to the RBNZ, NZ banks already meet the capital requirements of BASEL III so it seems unlikely they’ll be adding the yellow metal to their balance sheets either we'd say.

Greg Canavan in the Daily Reckoning Australia this week outlined why he doesn’t think the Tier 1 re-rating of gold will mean banks buy gold:

“--One area of the Basel III banking reforms picked up with enthusiasm by the gold community was the change to gold's classification as a risk free asset. It was only a footnote in a Bank for International Settlements update, but it caused some excitement. Here's the footnote:

'...at national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%. In addition, cash items in the process of collection can be risk-weighted at 20%.'

--The thinking goes that because banks won't need to set aside regulatory capital for gold holdings, it would increase the demand for it. 

--We're not so sure. 

--Firstly, we're not a fan of physical gold being anywhere near the banking system. It's just allows bankers to lend it out and create multiple claims on a single ounce.

--And banks aren't going to go out and buy gold to take advantage of the 'risk-free' definition. Banks make money from their assets generating a better return than their liabilities. Gold doesn't generate a yield in the way other financial assets do. That's because it's actually riskless...hence no need for compensation in the form of an interest payment.

--Our point is that banks make money based on a positive net interest margin. Buying gold with, say, depositors funds (a liability of the bank) would hurt the net interest margin. Yes gold has gone up in price, but it's not actual cash flow, which is important for the banks. 

--As far as we understand it (which is not much...the more we look into the gold market, the less we know) gold doesn't have a natural home in the commercial banking system. It's not 'money' in the way that paper money is. It's more at home in central bank vaults, being a store of wealth for nations rather than a plaything for banks. It also doesn't hurt for individuals to store some of their wealth, OUTSIDE THE SYSTEM, in the ancient metal either. 

--So don't rejoice just because gold appears to be gaining some credibility. It's far more powerful 'outside the system'. “

If you want a thorough run down of both sides of the argument on the impacts of BASEL III then check out this other article we read on the subject this week. Basel III And Gold