Redefining Gold’s Role in Global Banking Regulation

Traditionally, global banking regulations have categorized cash and government bonds as the primary components of High-Quality Liquid Assets—assets designed to ensure that financial institutions can remain resilient during periods of extreme market disruption.

However, the WGC and LBMA argue that increased market transparency and robust new data necessitate a re-examination of gold. The newly launched website, HQLA.gold, serves as a comprehensive resource for investors, policymakers, and regulators to evaluate gold’s liquidity against Basel III standards.

The Case for Gold as a ‘Level One’ HQLA

The collaboration aims to elevate gold’s status to a Level One HQLA, placing it on par with the world’s most stable government securities. The WGC and LBMA highlight several defining features that support this reclassification:

• Low Risk & Ease of Valuation: Gold’s universal value and transparent pricing mechanisms.
• Market Depth: A massive, global pool of liquidity that remains active even during crises.
• Resilience Under Stress: Gold’s historical performance as a “flight-to-quality” asset during economic downturns.
• Regulatory Alignment: Drawing on academic analysis and market evidence to meet Basel III’s specific safety criteria.

A Unified Push for Regulatory Change

The launch of the HQLA website marks a significant milestone in the advocacy efforts of both organizations. By bringing together regulatory context and clear market evidence, the WGC and LBMA are providing a roadmap for gold’s integration into the modern financial system’s safety net.

“WGC and LBMA are committed to working together for the advancement of gold’s reclassification as a High-Quality Liquid Asset,” the organizations stated. “It is time to review the uniform definitions and include gold as an HQLA.”

Why This Matters for Investors and Policymakers ?

If gold is successfully reclassified as an HQLA, it would allow banks to hold gold to meet liquidity coverage ratios. This could lead to:

• Increased Institutional Demand: Central and commercial banks may increase gold holdings for regulatory compliance.
• Market Stability: Strengthening the role of gold as a stabilizer within the banking sector.
• Modernized Standards: Aligning 21st-century market data with decades-old banking definitions.

For more information, research, and data-driven analysis on gold’s liquidity characteristics, visit the new portal at hqla.gold.

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The confusion stems from a misunderstanding between two different regulatory terms: capital rules and liquidity rules. “Tier 1” refers to capital rules that were defined in the original Basel I framework introduced in 1988. Under these rules, gold held in a bank’s own vault already qualifies as a Tier 1 asset with zero risk weighting — a status that remains unchanged through Basel I, II, and III.

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In contrast, HQLA status is part of the liquidity rules introduced in Basel III, specifically under the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) frameworks, which became effective in 2019. Here, gold currently does not qualify as a Level 1 HQLA.

Some articles have falsely claimed that gold is set to be reclassified as either “Tier 1 HQLA” or “Level 1 HQLA” — but these claims are incorrect. “Tier 1 HQLA” itself is a non-existent term because Tier 1 and HQLA belong to completely different regulatory categories.

While LBMA continues to advocate for gold to be considered as Level 1 HQLA — given its liquidity, low volatility, and performance in financial stress scenarios — no official announcement has been made, and such a change is not currently expected.

This clarification is important for financial professionals and investors, especially as misleading information could cause confusion in markets or misinformed expectations about gold’s regulatory treatment.

What is this mean in simple terms

1. No Change in Gold’s Treatment Under Basel III Rules

Despite online rumors, gold is not being upgraded to a Level 1 High-Quality Liquid Asset (HQLA). That means:

• Banks cannot treat gold like cash or top-rated government bonds for liquidity requirements under the Liquidity Coverage Ratio (LCR).
• Gold will continue to attract a higher “stable funding” requirement (85% RSF) under the Net Stable Funding Ratio (NSFR), making it less attractive for banks to hold for liquidity purposes.

2. Gold Remains a Strong Capital Asset

Gold still holds Tier 1 capital status under Basel rules:

• Gold held in a bank’s own vault gets 0% risk weighting, meaning it’s treated as very safe in terms of capital adequacy.
• This status has not changed since Basel I (1988) and continues under Basel III.

3. Central Banks and Institutional Investors Unaffected

Central banks and long-term institutional investors don’t rely on gold’s HQLA status to justify holding it. They hold gold for reasons like:

• Inflation hedging
• Currency diversification
• Crisis resilience

So this clarification doesn’t affect their gold demand.

Here is LBMA’s full clarification on the matter:

”There have been inaccurate reports online that gold will be reclassified as Tier 1 HQLA (High Quality Liquid Asset) under Basel III as of July 1, 2025. This information is not correct; no official announcement has been made or is expected on gold gaining HQLA status. 

Why is there confusion?

There is a lot of online misinformation about Basel III more broadly. Related to gold specifically, various websites state that gold will be reclassified as Tier 1 HQLA on July 1. Let’s pause here. Tier 1 refers to capital rules that were written in the original Basel Accord in July 1988 which became known as Basel 1. HQLA is a function within the liquidity rules of LCR and NSFR which were first written into Basel 3 and implemented by Basel on January 1, 2019. People are getting mixed up between capital rules and liquidity rules. LBMA is advocating for gold to be reclassified as Level 1 HQLA – again note this isn’t Tier 1 because HQLA relates to a liquidity rule.

A lesser number of articles say that gold is due to become Level 1 HQLA but again this isn’t correct, as stated above no announcement has been or is expected.

Gold is already a Tier 1 asset under the Basel Capital Accords meaning that it has a 0% risk weight. This is true for all three Basel Accords. The rule states that gold held in a bank’s own vault is deemed as a Tier 1 asset with a zero-risk weighting. Nothing has changed since the original Basel I Accord was created in 1988.

Gold is not due to be reclassified as a Level 1 HQLA – if it were, we and the WGC would be the first to shout about it. LBMA continues to advocate with the central bank and prudential regulatory community that gold meets all criteria to warrant HQLA status. The latest research on this, by Professor Dirk Baur et all (2024) (SSRN), argues that gold meets the characteristics of a Level 1 HQLA, namely low bid-ask spreads, high volumes, relatively low volatility and negative correlation with risky assets during stress periods. The quantitative analysis shows that gold is highly liquid and, indeed, among the most liquid assets across a sample of top tier government bonds both on a long term and during a financial stress event. Gold generally performs similarly to a 30-year US Treasury bond. Adding gold to a HQLA portfolio enhances its resilience. The paper also includes a revised liquidity test that was first used in 2013 by the European Banking Authority. Gold is remarkably liquid with an Amihud measure of 0.102 compared with US Treasury bonds with Amihud measure estimates ranging from 0.055 (3-5 year bonds) to 1.321 (10-20 year bonds). A further SUERF Policy Brief, written by David Gornall (Senior Advisor, LBMA, and LBMA Chairman June 2011 to July 2014) and Edel Tully (Director of Financial Services, LBMA), makes a similar argument for gold as a Level 1 HQLA.

What are the different weightings for gold currently within Basel III?

There is often some confusion over the status of gold within Basel III due to the different weightings and ratings that are used within the rules of the 1,600-odd page rulebook.

There are three percentages relating to gold: 0%, 20% and 85%: 

• 0%
  Gold benefits from a 0% rate for Bank Tier 1 capital. Claims secured by allocated gold also have a 0% risk weight under the Risk Weighted Asset credit risk rules. This is the same as for cash and was the same treatment used in the first version of Basel.
• 20%
  The current Basel-based prudential regulatory framework allows clearing houses the ability to accept gold as a collateral for margin payments with a haircut of 20%. 
• 85%
  As gold sits outside of the High-Quality Liquid Asset list, it suffers from an 85% required stable funding (RSF) factor and a 0% available stable funding factor under the Net Stable Funding Ratio (NSFR) rules. This is the same RSF factor as corn or lead and was only introduced with the last version of the rules in Basel III.

The above also demonstrates the somewhat inconsistent treatment of prudential regulation of gold, in particular when comparing its treatment under credit risk and eligibility as collateral versus its treatment for liquidity coverage purposes.

What are the timelines?

Most jurisdictions follow Basel implementation timetables, apart from the EU, UK and the US. The final Basel III rules, also known as Basel 3.1 and Basel III endgame, have been delayed consistently across these three major jurisdictions since the BCBS first proposed Basel 3 reforms following the global financial crisis. The EU has delayed some of the key reforms to January 2026. The UK has delayed implementation to 2027 and in the US, given the current political landscape which favours less regulation and heavy lobbying, the timetable is unclear.”

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Disclaimer:
The information provided in this article is for informational purposes only and reflects the views of industry experts. Before making any investment decisions, it is recommended that you consult a financial advisor. The team at Gold Price Today does not engage in personal buying, selling, or trading of gold or silver on exchanges. We are not responsible for any gains or losses incurred based on the information presented here.