Will New EU Banking Restrictions Cause Run on Physical Gold?

May 24th, 2013 by


The European Union is moving to make illegal the practice of banks and brokers using the assets they hold for clients as collateral for their own trades without the depositors; knowledge, a practice known as “shadow banking.”

It is currently legal for banks in Europe and the U.S. to use deposits as “free collateral” to play the market without the knowledge or consent of the depositors. This includes not only cash deposits, but also physical gold deposits. These trades, unknowingly backed by the depositors, are made to increase the profits of the banks and brokerages. The depositors get nothing for the use of their assets.

As Bloomberg reports:

The handing over of collateral is an integral part of repurchase agreements, or repos — one of the activities under review by global regulators as part of their efforts to regulate shadow banking. The reuse of clients’ assets poses a potential threat to financial stability should one of a chain of firms that handled the securities go bankrupt, according to the document prepared by commission officials and dated May 15. Uncertainty about who holds an asset can fuel panic in times of market stress, according to the paper.

“Complex” chains of collateral can make it difficult for investors to “identify who owns what, where risk is concentrated and who is exposed to whom,” according to the document. “This has consequences for transparency and financial stability.”

Under the plans being weighed by the commission, banks and brokers holding securities for clients wouldn’t be allowed to reuse the assets for trading on their own account — speculation on the markets aimed solely at boosting their own revenues, according to the document.

Some pundits have speculated that the U.S. gold reserves have been rehypothicated in this manner, which is why the German government’s request for the return of their gold reserves held in the U.S. was denied. Recent tales of banks refusing to return client’s physical gold deposits, and giving them a check instead, could be attributed to the fact that the client’s gold was used by the bank to speculate on the market, and is no longer in the possession of the bank.

Trying to back-trace the “collateral chains” to see who actually owns physical gold deposits and who (and how many) have a claim against the gold could  be a long and lengthy process, and spark lawsuits and panic in the market.

If banks and brokerages are forced to obtain (demand?) permission from depositors to allow the firms to use their deposits to make profits for the bank with no compensation, the old loans and trades will have to be retroactively included. Dragging these already-consumated “shadow deals” into the daylight may induce depositors to withdraw their assets, or at the very least, demand a piece of the action, throwing the global financial system into turmoil.

by David Peterson