Change to gold risk weighting proposed by FDIC

Can't find too much information on this at the moment, but thought I would share and see if anyone has useful insight on the issue. You can see the notice here: http://www.fdic.gov/news/news/financial/2012/fil12027.pdf

On page 2 you can see that gold would be in the same class as cash in having a zero percent risk weighting.

What I am unclear on is:

What exactly are the implications of this?
What are the chances this Notice of Approved Rulemaking (NPR) will become the standard?
What is gold's current percent risk weighting?

This is out of my expertise and would appreciate some clarification if someone has it.

 

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A risk-weighting is, essentially, the FDIC's assessment of an asset's risk...that is to say, the FDIC, in the process of insuring a bank's deposits, says "You have this asset...but we estimate there is some amount of risk that that asset will lose value, so you may count it at only X%" The "X%" is the risk-weighting.

Currently, Gold's risk-weighting is 50%. That is to say, if a bank holds 100 oz of gold bullion, it may count 50 oz as an asset.

This change would, essentially, make gold the same as cash from the FDIC's point of view.

This doesn't mean "the FDIC is making gold money again!!11!!oneone" or any nonsense of the sort (which is already cropping up online). It simply means that when the FDIC evaluates a bank to INSURE ITS DEPOSITS, it will count an ounce of gold bullion as an ounce of gold bullion, not half an ounce.

This proposed rule change basically simply seeks to say that the downside risk to gold is low enough that the FDIC's not going to get worked up over it.

 

Interesting, but why the change? I was thinking maybe to prop up their books and reduce exposure to other unsafe assets.

 

I wouldn't begin to speculate WHY the federal government does...well...anything.

 

I am afraid some will see this downside risk the same as downside price, and it is not that at all. It is margin of risk that it might become valueless as an asset on the bank books. Mortgages and building loans have a 50% risk.

 

That's an excellent point.

Saying that something has a 0 risk weight is NOT the same as saying it can't lose value.

The FDIC is saying "You won't go broke holding gold any more than you'll go broke holding cash"...they are NOT saying "Gold won't go down".

 

Yes, but in this instance it seems that cash has even more risk than gold because of inflation. The paper gold price is not the definitive value of gold. Seems clear to me that going broke holding cash is more plausible than holding gold or silver, physically.

 

All you're doing is rehashing one of the oldest arguments on the internet, not much point in staging round 39,495,596 of it here.

The FDIC's proposal is what it is, as described previously. If others wish to discuss its merits, I'll bow out gracefully.

 

They won't let this happen I bet (powers that be are better off with low gold prices). Should be good for gold prices if it does occur though. Makes it more attractive to have gold on your balance sheet.

 

the fed is tptb. If they want it they will have it. This should increase assets on their books if they don't need to count it as half liability. To me this move represents a vote of confidence in gold because they are recognizing gold as a stable vehicle of wealth preservation, imo.

 

I think the change in the rule would be a mistake. If everything is denominated in dollars, then anything not dollars inherently has a risk. Its how the system is set up. If everything was denominated in grams of gold then dollars would have a risk, (probably higher than the other way around).

I think getting rid of risk weighting for any commodity is an error. Now, I also believe 50% the same as housing is too severe, and would be ok with only a 10% risk weighting, but especially at today's prices relative risk of all commodities are there. The fact is they AREN'T dollars, so that should be calculated in.

To me the whole thing sounds more like a bank bailout, (loosening rules), than it does anything positive for gold.

 

Keep in mind, the US Treasury and the Federal Reserve only value gold to be worth $42.22/ounce in lawful money.

This is the valuation of the gold in Ft. Knox.

 

It looks like they are just trying to make it easier to meet capital requirements. Also, but I'm just guessing here [and someone else can look into it if they like], they might be bringing US regulation into like with some international standard.

 

Good point. I know a lot of accounting rules are getting changed to meet international standards, but IDK if this is the case here.

 

That's not what they pay for it, is it?

 

They can pay you zero for it if they want.

 

I dont have any to sell. I don't understand the relevance of what they say each ounce is legally worth. They sell silver eagles and they aren't worth face.

 

I don't understand why that is a problem. The US Mint isn't saying ASEs are worth $1 each. They sell them for a price related to the silver content.

 

The US Treasury and Federal Reserve do not have an official price for silver. This was abandoned in 1968. They are only concerned about gold. This ought to tell you something.

 

Maybe I'm dense, but I don't see the message. Could you elaborate?