Commercial bank ‘gold swap’ intrigue continues | FT Alphaville

Commercial bank ‘gold swap’ intrigue continues

The footnote in the Bank of International Settlement’s latest annual report, which revealed the bank was sitting on 342 tonnes worth of gold (about $14bn)  as part of a ‘gold swap’ deal with a (or some) mysterious counterparties has on Thursday been further clarified.

The Wall Street Journal’s version of the story, which described the counterparties involved as central bank institutions, has been retracted in favour of the Financial Times’ original – which said the counterparties were European commercial banks.

As the WSJ noted:

The Bank for International Settlements said it loaned billions of dollars backed by gold to commercial banks in recent months. Most of the loans—known as gold swaps—were conducted with European banks in exchange for foreign currencies, mainly U.S. dollars, according to data released last week in the BIS’s annual report.

“The operations concerned were purely market operations with commercial banks,” the BIS said in an email statement. The statement came in response to a Wall Street Journal article on Wednesday that said the BIS swaps were with central banks.

The sheer size of the recent swaps—involving 349 metric tons of gold, valued at about $14 billion currently—indicates the stress that the international banking system is under, particularly in European countries facing investor concerns about sovereign-debt woes.

As the report explains, while the BIS — known as the “central bankers’ central bank” — is only allowed to take deposits from said central institutions, it can lend to a broader spectrum of financial institutions, including commercial banks and corporations.

(Although we can’t actually find the relevant bit in the BIS mandates that says as much — and would welcome a link if anyone has it.)

The continuing mystery, though, is how European commercial banks managed to get hold of as much as 342 tonnes worth of gold.

Lex speculated on Thursday:

Traders theorised that one or more of the bloc’s central banks pawned gold to prop up their groaning banking systems. Spain’s regional savings banks, or cajas, and Greek lenders, for example, have sucked in copious liquidity in recent months and are likely to need more. These transactions bore all the hallmarks of a furtive operation to assist a peripheral eurozone central bank unwilling to be seen pawning its reserves.

But the swaps raised only $14bn – surely not enough for any such sweeping operations. Another tale was that the central banks used swaps for bridging finance pending drawdown of the eurozone rescue package; but again, the numbers fail to stack up. An even more far-fetched explanation has the International Monetary Fund selling reserves to boost its own finances ahead of a bail-out.

Which seems to suggest the mystery remains unsolved.

Nevertheless, there is one thing of which we can be sure: the bulk of gold-swapping did take place in January, and that coincides with the expiry of the Federal Reserve’s dollar swap-line facility on February 1.

And as we know, the ECB and the Fed were very quick to reinstate those swap lines as soon as Eurozone strife did break out.

Yet — despite all –the facilities have hardly been utilised (as highlighted by the red box):

Which could be down to the extra liquidity provided to commercial banks by the BIS gold-swap corridor.

Then again, a cunning extra $14bn worth of liquidity via gold swaps is hardly anything to sing and dance about compared to the peak use of the facility back in December 2008. Back then that amounted to some $583bn.

But if determining financial stability is all about keeping up appearances, maybe accessing a little bit of extra liquidity a little less obviously does makes sense…?

Related links:
Some BIStoric gold swaps
– FT Alphaville
Gold swaps versus gold loans – IMF Committee on Balance of Payments
Central banks swap tons of gold to raise cash, surprising market – WSJ
European banks use gold reserves to raise cash – FT