Why Gold Has 0% Risk Weight but an 85% Funding Penalty

Key Takeaways

Allocated physical gold has carried a 0% risk weight in bank capital rules since 1988, the same treatment as cash and top-rated government bonds. [LBMA, May 2025]

Despite that capital treatment, gold is excluded from the High-Quality Liquid Asset (HQLA) list and cannot count toward the 30-day liquidity buffers required under Basel III. [Basel Committee on Banking Supervision, 2010]

Under the Net Stable Funding Ratio (NSFR), gold attracts an 85% Required Stable Funding (RSF) factor — the same rate applied to commodities such as corn and lead. [LBMA, May 2025]

In June 2026 the London Bullion Market Association (LBMA) asked the Bank of England’s Prudential Regulation Authority (PRA) to address this disparity, noting roughly $510 billion in average daily global gold trading volume. [LBMA, June 2026]

Regulatory momentum is moving toward greater recognition of gold’s liquidity. Each step narrows the cost of holding gold on bank balance sheets and supports growing institutional demand for physical gold.

Gold trades roughly $510 billion every day, with the London over-the-counter market representing about $230 billion of that activity. Bid-ask spreads in the major bullion markets are comparable to those in sovereign bond markets. Allocated bars held in central bank custody can be transferred between accounts by book entry, and they are frequently monetized within the same business day via OTC sales, swaps, or exchange trading.

By practical liquidity measures, allocated gold behaves like a top-tier asset. Yet banking regulations treat the asset differently for liquidity purposes than they do for capital purposes. That contradiction is explicit, documented, and the focus of a recent regulatory petition. Understanding it clarifies where institutional demand for physical gold is likely to go.

What Does “High-Quality Liquid Asset” Actually Mean?

The Liquidity Coverage Ratio (LCR) requires banks to survive a 30-day funding stress without external support. To meet that test, banks must hold a buffer of assets that can be converted to cash quickly and without significant loss: High-Quality Liquid Assets, or HQLA. Typical HQLA include cash, central bank reserves, and high-quality sovereign bonds.

Gold is not included in the official HQLA list. When the Basel Committee released the LCR rules in December 2010, gold was excluded amid concerns about limited trading data and price volatility at the time. Although the rules have been updated several times since then, gold has remained outside the formal HQLA framework.

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How Does Basel III Treat Gold for Capital Purposes?

Here the inconsistency becomes clear. Capital adequacy rules trace back to the Basel Accord of 1988. Under those rules allocated physical gold receives a 0% risk weight, the same treatment as cash and the highest-quality sovereign bonds. The rationale is simple: allocated gold held in a vault carries no counterparty risk because it has no issuer and thus cannot default.

That 0% capital risk weight has persisted through successive Basel iterations and remains unchanged. It represents a strong institutional endorsement of allocated gold as a capital-preserving asset. Yet the same bars that qualify for 0% capital treatment are not recognized as usable liquidity under the LCR, creating an unusual divergence between capital and liquidity regimes.

What Is Gold’s Required Stable Funding Factor Under Basel III?

The Net Stable Funding Ratio (NSFR) is the other major Basel liquidity standard. It measures the amount of stable funding banks must hold relative to the liquidity characteristics of their assets. Each asset class receives a Required Stable Funding (RSF) factor: the higher the RSF, the more stable funding a bank must maintain against that asset.

Gold’s RSF is currently set at 85% — the same category used for equities and many physical commodities. Practically speaking, a bank that holds $100 million of gold must maintain $85 million of stable funding such as equity, long-term debt, or stable retail deposits. That requirement raises the cost of hosting gold on a bank’s balance sheet compared with assets that carry much lower RSF rates.

Regulators justified the high RSF by treating gold like a commodity. But trading and stress-period data increasingly challenge that assumption.

What Does the Trading Data Say About Gold’s Liquidity?

Recent data show gold’s daily trading volumes at roughly $510 billion on average, with London OTC markets contributing about $230 billion of that total. For comparison, the US Treasury market trades in the $600–$700 billion range per day. While gold does not match Treasuries exactly, it is in the same order of magnitude and has behaved like a sovereign bond during stress events rather than a thinly traded commodity.

Academic work and industry studies have benchmarked gold’s liquidity using measures such as bid-ask spreads, trading volume, and the Amihud illiquidity ratio. Those studies find that gold’s liquidity metrics are much closer to high-quality sovereign debt than to typical commodities. During January 2026’s stress period, for example, average daily trading activity across major venues surged, demonstrating resilient market functioning rather than a collapse in liquidity.

Taken together, the empirical evidence supports the view that gold behaves as an HQLA in all but regulatory designation. Advocacy groups and industry participants continue to press regulators to align rules with market reality.

What Is the LBMA Asking the Bank of England to Do?

In March 2026 the Bank of England’s Prudential Regulation Authority consulted on modernizing the liquidity policy framework, focusing on operational readiness — how quickly banks can access assets in stress. That consultation provided the LBMA an opportunity to request clearer guidance.

The LBMA’s submission highlighted that many PRA-regulated banks maintain allocated gold accounts within the Bank of England’s custody system. That gold is physically held in central bank vaults and is transferable between accounts by book entry. It can be monetized rapidly through established market channels. The LBMA asked the PRA to: provide guidance on how Bank of England–held gold should be treated in internal liquidity assessments; require firms to document gold monetization performance under stress; and evaluate whether allocated gold held at the Bank could, over time, be accepted as central bank collateral.

Why Does This Matter for Physical Gold Owners?

The regulatory gap between capital and liquidity treatment stems largely from decisions made when market data were sparser. That evidence now exists and shows a different picture. If regulators narrow the gap, banks will face lower costs to hold gold; lower costs will increase institutional demand; greater institutional demand against a relatively inelastic supply tends to support higher prices.

Since implementation of NSFR rules in the UK in January 2022, bullion banks have shifted away from unallocated claims toward allocated custody of physical bars — a trend that increased demand for secure vaulting. Central bank purchases of gold have also been substantial in recent years, and the persistent 0% capital risk weight helps gold maintain its role within sovereign reserve allocations. If liquidity rules evolve to recognize gold more fully, the structural case for physical ownership strengthens further.

Is Gold Actually a High-Quality Liquid Asset?

Formally, as of June 2026, gold remains excluded from the Basel III HQLA list. Industry statements caution that no official reclassification has been announced. That said, empirical measures paint a nuanced picture: by liquidity metrics, stress-period performance, and market structure, allocated gold meets many of the characteristics that define Level 1 HQLA.

The regulatory gap has been closing for years, and the LBMA’s filing in June 2026 is the most explicit institutional effort to align liquidity rules with market evidence. While the timing of any regulatory change is uncertain, the direction of travel is toward greater recognition of gold’s liquidity.

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People Also Ask

What is the difference between allocated and unallocated gold, and why does it matter for bank regulation?

Allocated gold refers to specific, numbered bars kept in a vault and legally owned by the client; the custodian bank has no claim on those bars. Unallocated gold is a creditor relationship: the customer holds a claim against the bank for a given quantity of gold but no particular bars are identified. Under the NSFR, unallocated positions attract an 85% RSF. Allocated custody often sits off a bank’s balance sheet, which changes regulatory treatment and is one reason the market has moved toward physical allocated holdings.

If gold were officially added to the HQLA list, what would happen to demand?

Official HQLA recognition would remove a structural disincentive for banks to hold gold as part of their liquidity buffers. That would lower institutional holding costs, increase demand from regulated entities, and likely reduce financing costs in the bullion market. The net effect would be greater institutional adoption of physical gold, though the exact magnitude depends on calibration such as haircuts and RSF adjustments.

How does the Liquidity Coverage Ratio work, and where does gold fit today?

The LCR requires banks to hold HQLA sufficient to cover net cash outflows over a 30-day stress period at a minimum 100% ratio. Because gold is not HQLA-eligible, banks cannot count gold held on their balance sheet toward this requirement and must use other assets instead. Allocated gold held in central bank custody for clients typically sits off the bank’s balance sheet and therefore does not affect the LCR calculation — making BoE-held allocated gold a focal point for arguments about operational readiness and usability.

Does silver face the same regulatory gap as gold?

Silver faces a similar regulatory gap but with some important differences. Like gold, silver is excluded from HQLA and carries an 85% RSF under NSFR. Unlike gold, silver has never been granted a 0% capital risk weight. Silver also lacks the same central bank custody infrastructure and the depth of advocacy that the LBMA has brought on behalf of gold, so regulatory progress for silver typically follows gold rather than leading it.

What is Basel IV, and could it change gold’s regulatory treatment?

“Basel IV” is a common label for the finalising reforms to Basel III focused on risk-weighted asset standardization. While those reforms standardize capital calculations, they do not directly alter gold’s HQLA or NSFR classifications. Implementation timelines have shifted across jurisdictions, creating opportunities for national regulators to make interim adjustments. As a result, immediate change is more likely to come from national supervisory decisions than from an international Basel rule revision.

SOURCES
1. LBMA — Response to PRA Consultation Paper CP5/26: Modernising the Liquidity Policy Framework, June 2026
2. LBMA — Gold and HQLA: Correcting Misleading Online Information, May 2025
3. World Gold Council — Gold Demand Trends Full Year 2025; Gold Demand Trends Q1 2026; Does Gold Qualify as an HQLA Under Basel III? (June 2025); Has Gold’s Performance Structurally Changed? (April 2026)
4. Bank of England — CP5/26: Modernising the Liquidity Policy Framework, March 2026
5. Bank of England — PS9/24: Implementation of the Basel 3.1 Standards, September 2024
6. Basel Committee on Banking Supervision — Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools, December 2010 / January 2013

Disclaimer: This article is informational and not financial advice. Consult a qualified adviser before making investment decisions.