The World Gold Council (WGC) and the London Bullion Market Association (LBMA) are working together to for the advancement of gold as a high-quality liquid asset (HQLA).
HQLAs are are unencumbered assets that banks hold to ensure they can be easily and immediately converted into cash at little or no loss of value during periods of financial stress.
They are intended to be reliable sources of liquidity, even in challenging or volatile market conditions.
Assets are required to meet seven characteristics to be considered as HQLA. They must be low risk, with ease and certatinty of valuation; the assets must have low volatility and low correlation with risky assets; they must be listed on a developed and recognised exchange; and favoured in a flight to quality during systemic crises.
Finally, the asset should have active outright sale and repo markets all the time.
HQLA are considered to be relatively safe assets to hold within the Liquidity Coverage Ratio (LCR) and Net Stable Funding Requirement (NSFR) rules for banks.
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There are two types of HQLA. Level 1 comprise government bonds and cash. Level 2 includes covered bonds and high quality corporate debt securities.
Gold was initially included as an HQLA in 2013 by the Basel Committee on Banking Supervision (BCBS) but subsequently removed, as it not meet two of the seven characteristics of HQLA. This was mainly due to a lack of sufficient data and the inability to calculate the Amihud ratio (the standard measure used to capture illiquidity).
However, since 2018 it is now possible to measure these liquidity characteristics drawing on new daily trading data published by the LBMA.
