Author: Ronald Stöferle

Author: Ronald-Peter Stoeferle, CMT, CFTe, MSTA

1. Introduction: Navigating the Complexities of Basel III and Gold

As there is lots of confusion around HQLA, Basel III regulations and how its implementation is going to impact the gold market, I felt it was appropriate to shed light on this topic. This article will provide an overview of the imminent changes, hopefully clearing any doubts and misunderstandings that have emerged from this issue, as well as demystify the status of gold and offer a well-founded analysis of the arguments for its potential role as HQLA.

The Basel III framework, developed by the Basel Committee on Banking Supervision (BCBS) in response to the 2008 Global Financial Crisis (GFC), represents a global regulatory standard aimed at strengthening banks’ capital adequacy, liquidity management, and risk governance.1 Despite its comprehensive nature, significant confusion and misunderstandings persist regarding specific components, particularly the Liquidity Coverage Ratio (LCR), the definition of High-Quality Liquid Assets (HQLA), and the Net Stable Funding Ratio (NSFR). This confusion is especially pronounced when it comes to the regulatory treatment of gold.2

Scrolling through X or LinkedIn this past few months and you’ve definitely found breathless claims that “gold becomes Tier‑1 Level‑1 HQLA on 1 July 2025”3 or that unallocated paper gold holdings will become “significantly more costly for banks… prompting financial institutions to dispose of it.”5 The problem?

• Tier 1 and Level 1 HQLA live in different parts of the Basel rulebook.
• No regulator has scheduled a reclassification of gold for July.

The primary source of this confusion lies in the differentiated treatment of gold: on the one hand, it enjoys a favorable classification for capital adequacy purposes as a Tier 1 asset with a 0% risk weight, underscoring its safety and value.6 On the other hand, it is treated less favorably for liquidity purposes, as it is not currently classified as HQLA and carries a high Required Stable Funding (RSF) factor of 85% under the NSFR.2 This distinction between capital and liquidity rules is often not clearly perceived or is conflated in public discourse, leading to misinterpretations. The term “Tier 1” itself, which suggests the highest quality in the context of capital requirements, may contribute to the assumption that gold should also hold a top position for liquidity purposes.

Additionally, ongoing delays and varying implementation of the final Basel III package, often referred to as “Basel III Endgame” or “Basel 3.1” and was due to take effect next month, across different jurisdictions exacerbate the uncertainty.7 Obviously, these shifts in the implementation of the overarching framework make it difficult for market participants to develop a clear and stable view of the regulations, including those affecting gold.

2. Decrypting Basel III Liquidity Standards

To understand gold’s role within the Basel framework, a detailed examination of the two central liquidity metrics – the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) – is essential.

2.1. The Liquidity Coverage Ratio (LCR)

The LCR was introduced to strengthen the short-term resilience of banks’ liquidity risk profiles.1 Its objective is to ensure that banks have an adequate stock of unencumbered, high-quality liquid assets (HQLA) to cover their net cash outflows over a 30-calendar-day stress period.4 The formula is:

LCR = High quality liquid asset amount (HQLA) / Total net cash flow amount, ≥100%9

HQLA are defined as assets that can be easily and immediately converted into cash with little or no loss of value, even in times of stress.1 The criteria for HQLA, as defined by the BCBS (2013), include1

• Fundamental Characteristics:
  • Low risk: Assets with lower risk tend to have higher liquidity. This includes high credit quality of the issuer and a low degree of subordination. Low duration, low legal risk, low inflation risk, and denomination in a convertible currency with low foreign exchange risk also enhance an asset’s liquidity.
  • Ease and certainty of valuation: An asset’s liquidity increases if market participants are more likely to agree on its valuation. Assets with standardized, homogeneous, and simple structures tend to be more fungible, promoting liquidity. The pricing formula of an HQLA must be easy to calculate and must not depend on strong assumptions. The inputs into the pricing formula must also be publicly available.
  • Low correlation with risky assets: The stock of HQLA should not be subject to “wrong-way” (highly correlated) risk. For example, assets issued by financial institutions are more likely to become illiquid in times of liquidity stress in the banking sector.
  • Listed on a developed and recognized exchange: Listing on an exchange increases an asset’s transparency.
• Market-Related Characteristics:
  • Active and sizable market: The asset should have active outright sale or repo markets at all times. This means historical evidence of market breadth and depth (e.g., low bid-ask spreads, high trading volumes, large and diverse number of market participants) and robust market infrastructure.
  • Low volatility: Assets whose prices remain relatively stable and are less prone to sharp price declines are less likely to trigger fire sales to meet liquidity requirements.
  • “Flight to Quality”: Historically, the market has shown tendencies to move into these types of assets in a systemic crisis.

HQLA are further divided into different levels: Level 1 includes the highest quality assets with no haircut (e.g., central bank reserves, certain government bonds). Level 2A (e.g., corporate bonds with an AA- rating, covered bonds) is subject to a 15% haircut, and Level 2B (e.g., lower-rated corporate bonds, RMBS, some equities) is subject to haircuts of 25-50%.1

The design of the LCR naturally prioritizes assets with deep, stable markets and unquestionable creditworthiness, which primarily favors government bonds of major economies.1 Criteria such as “low risk,” which includes “high credit quality of the issuer”1, favor government-issued debt securities. Gold, which does not have an “issuer” in the traditional sense, faces a structural hurdle here, even if it meets other criteria such as “no credit risk.”

2.2. The Net Stable Funding Ratio (NSFR)

The NSFR aims to promote resilience over a longer time horizon of one year by requiring banks to fund their activities with more stable sources of funding on an ongoing basis.4 The formula is:

NSFR = Available Stable Funding (ASF) / Required Stable Funding (RSF), ≥100%10

ASF is the portion of capital and liabilities considered reliable over a one-year horizon. RSF is a function of the liquidity characteristics and residual maturities of assets, as well as off-balance sheet exposures. Different assets are assigned different RSF factors, reflecting their presumed liquidity and need for stable funding.9

The calibration of the NSFR, which considers the maturity, quality, and liquidity value of assets10, directly leads to the high 85% RSF factor for gold. This high factor implies that regulators view gold as an asset requiring significant stable funding, treating it more like a less liquid commodity than a cash-like reserve, regardless of its LCR-relevant properties.2 This indicates a discrepancy: even if gold performs well under LCR stress metrics, its NSFR treatment reflects a different, longer-term view of its funding stability requirements.

3. The Official Status of Gold Under Basel III: Clarifying the Rules

The regulatory treatment of gold under Basel III is multifaceted and a primary cause of confusion. It is crucial to distinguish between its role for capital adequacy and its treatment under liquidity standards.

3.1. Capital Adequacy (Risk-Weighted Assets – RWA)

Gold held in a bank’s own vault or on an allocated basis (to the extent backed by gold liabilities) is considered a Tier 1 asset for capital purposes with a 0% risk weight.6 This means banks do not need to hold capital against these gold holdings, similar to cash.2 This treatment has been consistent since Basel I.2

3.2. Liquidity Coverage Ratio (LCR)

Gold is currently not classified as HQLA (neither Level 1, 2A, nor 2B) for LCR purposes.2 Consequently, it cannot be included in the stock of HQLA that banks use to meet their LCR requirements.

3.3. Net Stable Funding Ratio (NSFR)

Gold is assigned an RSF factor of 85%. This means banks must fund 85% of their physical gold holdings with stable funding sources (ASF) that have a horizon of at least one year. This RSF factor for gold was only introduced with the last version of the rules in Basel III, on January 2019.2 This is a relatively high factor, comparable to other commodities.4

3.4. Gold as Collateral

Gold is recognized as eligible financial collateral for credit risk mitigation with a 20% haircut under the Supervisory Volatility Adjustments Approach in the EU/UK.2 Clearing houses can accept gold as collateral for margin payments.2

3.5. Clarifying Key Misconceptions

It must be explicitly stated that the 0% risk weight for capital (Tier 1 asset) is distinct from HQLA classification for liquidity.2 The widespread misinformation that gold will automatically be classified as Level 1 HQLA with the implementation of the Basel III Endgame is false; no official announcement has been made to this effect.2

The 0% risk weight for capital acknowledges gold’s safety and lack of credit risk.4 However, its exclusion from HQLA1 and the high RSF factor under the NSFR1 indicate a regulatory view that does not attribute sufficient, reliable liquidity characteristics to it for short-term and long-term funding stability purposes. This represents the core dichotomy: a high safety rating for capital purposes contrasts with an unfavorable rating of its liquidity characteristics.

The regulatory framework for gold appears fragmented. It is treated favorably as collateral and for capital purposes but unfavorably for key liquidity metrics (LCR/NSFR). This piecemeal approach might reflect historical conventions or a lack of consensus on its overall role in modern banking. Different parts of the Basel framework appear to assess assets based on different primary concerns, and gold performs well on some (e.g., credit risk mitigation) but not others (e.g., immediate, large-volume conversion to cash without market disruption from the perspective of a bank’s HQLA portfolio, or its need for stable long-term funding).

4. Gold: An HQLA in Practice? Examining the Evidence

Despite its official non-HQLA status, many argue that gold exhibits HQLA characteristics in practice. A detailed analysis of its features against Basel criteria and established HQLAs is insightful.

4.1. Assessing Gold Against Basel HQLA Criteria

According to analyses, including Baur et al. (2025), which draw on the 2013 BCBS criteria1:

• Fundamental Characteristics:
  • Low Risk: Gold has no credit risk.1 It can be interpreted as a low-duration asset and offers low inflation and currency risk due to its properties as an inflation and currency hedge.1
  • Ease and Certainty of Valuation: Gold prices are transparently determined in the market, even if not via traditional bond or equity models. It has a standardized, homogeneous, and simple structure.1
  • Low Correlation with Risky Assets: Gold has an established safe-haven characteristic, performing well in crises and exhibiting a negative correlation with equities.1
  • Listed on a Developed and Recognized Exchange: Gold is traded globally on established exchanges.1
• Market-Related Characteristics:
  • Active and Sizable Market: Gold exhibits high daily trading volumes1, tight bid-ask spreads, and a diverse participant structure.1
  • Low Volatility: Gold’s volatility is comparable to that of 30-year US Treasury bonds and lower than that of many individual stocks.1
  • “Flight to Quality”: Gold is a recipient of investment flows during periods of risk.1

4.2. Comparative Analysis: Gold’s Performance vs. Established HQLAs (US Treasuries)

Empirical data support the argument that gold behaves like an HQLA:

• Volatility: Gold’s average daily volatility (0.027%) is on par with 30-year US Treasury bonds (OTR) (0.028%) and higher than 10-year OTR notes (0.016%).1 During specific stress events, like tariff announcements, gold showed stability or lower volatility spikes compared to government bonds.1
• Bid-Ask Spreads: Gold’s average intraday spreads (approx. 2.2 basis points) are tighter than those of 30-year US Treasury bonds (3.3 bps) and slightly wider than those of 10-year US Treasury bonds (1.8 bps). Spreads remained tight or normalized quickly during stress periods.1 Baur et al. note that gold’s spreads are comparable to high-quality government bonds and even improved during the SVB crisis.1
• Trading Volumes: Gold’s average daily OTC trading volume on the LBMA (USD 145bn) rivals that of 7-10 year US Treasury bonds (USD 143bn).1 Using the Amihud illiquidity measure, Baur et al. show that gold is remarkably liquid (Amihud measure of 0.102) compared to various tenors of US Treasury bonds.2
• Crisis Performance: Gold prices rose during the April 2025 tariff turmoil, while government bonds experienced setbacks.1 Baur et al. show that gold increased in value during the 2023 SVB crisis and the 2020 COVID-19 pandemic, consistent with its safe-haven property.1

The following table summarizes a direct comparison of gold’s key characteristics with Level 1 HQLA:

Table 1: Comparison of Key Characteristics of Gold with Level 1 HQLA (e.g., US Treasuries) 

Compared to equities, some of which could technically qualify as Level 2B HQLA, gold significantly outperforms heavily traded names like NVDA and TSLA (which do not meet HQLA liquidity requirements) in terms of volatility and trading volume.1

The empirical evidence, from both the World Gold Council1 and academic studies like Baur et al.1, strongly suggests that gold meets or even exceeds many HQLA criteria, particularly market-related ones, when compared to assets already classified as Level 1 HQLA. The argument “HQLA in all but name”1 appears well-supported by this data. The consistency of these findings across different credible sources (industry association and academia) strengthens this case.

Furthermore, including gold in an HQLA portfolio can enhance its resilience and stability, potentially lowering risk and improving risk-return ratios, especially in times of crisis.1 The portfolio analyses in Baur et al. (2025) explicitly show that adding gold to portfolios of US Treasury bonds reduces volatility and/or improves the risk-return ratio for both the overall sample period and during crisis periods (SVB 2023, COVID-19, GFC 2008).1 This is a second-order benefit: not just “is gold liquid?” but “does gold make a liquidity portfolio better?”.

Systemically, the inclusion of gold could mitigate the sovereign-bank nexus and offer diversification against risks associated with holding predominantly sovereign debt. This is particularly true given gold’s independence from monetary policy measures that can affect bond markets (such as Quantitative Easing or Tightening).1 Since gold carries no credit risk and is not used for monetary policy purposes, it could mitigate these systemic risks. This is a third-order implication, ranging from asset characteristics to portfolio benefits to broader financial stability arguments.

5. The Impact of the 85% RSF Factor for Gold under the NSFR

The 85% Required Stable Funding (RSF) factor assigned to gold under the Net Stable Funding Ratio (NSFR) has significant consequences for banks and the perception of gold in the regulatory context. This factor means that banks must back 85% of their physical gold holdings with long-term, stable funding sources with a maturity of at least one year.4

This treatment places gold alongside other physically traded commodities and implies that, from an NSFR perspective, it is not considered an easily available source of funding over a one-year horizon without substantial backing.4 For banks, this means that holding physical gold becomes comparatively expensive from a funding perspective, especially compared to assets with lower RSF factors. Level 1 HQLA, for example, typically have RSF factors of 0-5%. This high requirement for stable funding can deter banks from holding gold in significant amounts for liquidity management purposes on their balance sheets, even if they were convinced of its potential LCR benefits if it were recognized as HQLA. The high RSF factor thus acts as a significant economic disincentive. The cost of funding can outweigh the perceived liquidity benefits under current rules, effectively keeping gold away from banks’ core liquidity buffers unless there are compelling, overriding reasons such as specific client needs or hedging requirements.

From a broader financial stability perspective, this treatment, should gold indeed possess strong HQLA characteristics, could limit the use of a potentially valuable instrument for bank liquidity and overall systemic stability. The NSFR treatment appears inconsistent with the arguments and data supporting gold’s liquidity and stability, particularly during stress periods, as highlighted for LCR purposes.

If gold is liquid and stable for a 30-day LCR stress, it is difficult to argue that it is almost entirely illiquid or unstable from a one-year NSFR perspective without further justification beyond “it is a commodity.” This suggests a potential internal inconsistency in how the Basel framework assesses gold’s characteristics across different time horizons or regulatory objectives.

The following table summarizes the current regulatory treatment of gold under Basel III, highlighting the different approaches:

Table 2: Summary of Current Regulatory Treatment of Gold under Basel III 

This table illustrates why confusion arises: gold is treated as “good” here (0% RWA), “okay” there (collateral), but “not good” or “penalized” elsewhere (not HQLA, 85% RSF).

6. The Evolving Landscape: Basel III Implementation and the Future of Gold

The discussion around gold’s regulatory treatment is not static. Advocacy efforts, the ongoing implementation of Basel III, and dynamic market developments influence perspectives.

6.1. Efforts for Reclassification

The World Gold Council (WGC) and the London Bullion Market Association (LBMA) are actively advocating for gold to be reclassified as Level 1 HQLA.2 They point to research findings, such as the study by Baur et al. (2025), which demonstrate that gold meets HQLA criteria.2

6.2. Status and Timeline of “Basel III Endgame” / “Basel 3.1”

The BCBS’s original effective date for the final Basel III reforms was January 1, 2023, with a five-year phase-in for some elements.11,12 However, there have been significant delays and deviations in implementation in key jurisdictions:

• USA: Proposed rules were published in July 2023, with an implementation target from summer 2025. However, there is opposition and potential further delays.6
• EU: The original target was January 1, 2025, with some parts postponed to January 1, 2026.8 The European Commission has conducted a consultation on potentially postponing the implementation of the Fundamental Review of the Trading Book (FRTB) to January 1, 2027.7
• UK: Implementation has been postponed to January 1, 2027.7

These delays are attributed to concerns about banks’ competitiveness, national interests, and the need for clarity from other jurisdictions.7 The significant delays and fragmentation in the implementation of the Basel III Endgame suggest that a potential reassessment of gold’s specific status will likely be a slow process, embedded in broader, complex geopolitical and national economic considerations. If finalizing the already agreed-upon framework is challenging, reopening debates on specific asset classes like gold would add an additional layer of complexity.

6.3. Potential for Future Reviews of Gold’s Status

Although there are no official announcements of upcoming changes to gold’s HQLA status2, ongoing lobbying and the accumulation of evidence1 suggest the discussion is not closed. The WGC believes regulatory authorities should revisit their initial decision whenever the rules are revised.1

6.4. Recent Statements from Regulatory Authorities (BIS, EBA)

Monitoring reports from the Bank for International Settlements (BIS), based on June 2024 data14 and published in March 2025, show overall LCR and NSFR levels for internationally active banks but do not mention any specific review or change to the HQLA/NSFR treatment of gold.13 They note that LCRs have slightly decreased, but NSFRs have remained stable, with most banks meeting minimum requirements.

Reports from the European Banking Authority (EBA), last updated in May 2025, focus on monitoring LCR and NSFR implementation in the EU and address specific issues like open reverse repos and operational deposits.15 The EBA’s May 2025 report does not mention any changes to the treatment of gold or its RSF factor; its focus is on other details of LCR/NSFR implementation.16

There is a clear gap between the strong advocacy for gold’s HQLA status by industry and academia (WGC, LBMA, Baur et al.) and the current silence or lack of specific commentary on this topic from key regulatory bodies like the BIS/EBA in their recent monitoring reports. This suggests that while the arguments are being made, they have not yet led to a concrete regulatory review at the highest level, at least not publicly.

The spread of inaccurate information2 about an impending HQLA reclassification of gold, fueled by discussions around the “Basel III Endgame” and gold’s 0% risk weight, underscores the urgent need for clear, authoritative explanations, such as this article attempts to provide. The implementation of the “Basel III Endgame”6 is a major event, and it is plausible that excitement or misunderstandings about it lead to false assumptions about specific asset treatments, especially for an asset like gold that already carries a “Tier 1” label in another context.

7. Conclusion: The Dichotomy of Gold in the Regulatory Framework

In summary, while gold may be an “HQLA in all but name”1 due to its behavior, its regulatory name for liquidity purposes remains different. Gold’s regulatory story under Basel III is characterized by a significant discrepancy between empirical market reality and established regulatory categorizations for liquidity. This gap fuels ongoing debate and confusion.

Although ongoing lobbying and compelling data support arguments for a reassessment, there are currently no official announcements or expectations of short-term changes from regulatory authorities.2 The path to regulatory reclassification of gold as HQLA is uncertain and likely lengthy. However, the robust data supporting its characteristics, coupled with continued advocacy and potential future market disruptions, could maintain long-term pressure on regulators to consider a reassessment, especially once the implementation of the Basel III Endgame has finally settled. Given the current lack of official signals from bodies like the BIS or EBA13, this remains a longer-term perspective.

Allow me to end this exposition with a final reflection: If gold already behaves like the safest bonds when markets seize up, shouldn’t we treat it that way in our own liquidity buckets? Simply put, regulatory status may lag, but markets have already voted. Gold has already been behaving like a Level 1 HQLA, even though the Basel rulebook hasn’t caught up to this reality yet.

For more information about the gold market and the factors that impact it, download the 2025 In Gold We Trust report, free of charge, and discover why gold truly is the safest, most liquid asset! 

Sources

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• Gold, the Hidden Leverage of Basel III Rules – GoldBroker.com, Accessed on June 4, 2025, LINK
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• Basel 3.1 Delays: Technology Implications and Opportunities for Banks | Nasdaq, Accessed on June 4, 2025, LINK
• Liquidity Coverage Ratio: Definition and How To Calculate – Investopedia, Accessed on June 4, 2025, LINK
• Liquidity Adequacy Requirements (LAR) (2026) Chapter 3 – Net Stable Funding Ratio – Office of the Superintendent of Financial Institutions, Accessed on June 4, 2025, LINK
• Basel III – Implementation – Financial Stability Board, Accessed on June 4, 2025, LINK
• Implementation status of final Basel III reforms varies across globe – Moody’s, Accessed on June 4, 2025, LINK
• Press release: Basel III risk-based capital ratios increase while leverage ratio and Net Stable Funding Ratio remain stable for large internationally active banks in the first half of 2024, latest Basel III monitoring exercise shows – Bank for International Settlements, Accessed on June 4, 2025, LINK
• Highlights of the Basel III monitoring exercise as of 30 June 2024, Accessed on June 4, LINK
• www.eba.europa.eu, Accessed on June 4, 2025, LINK
• The EBA updates Report on the monitoring of the liquidity coverage ratio and net stable funding ratio in the EU | European Banking Authority, Accessed on June 4, 2025, LINK