Banks cannot expect government to bail them out of every crisis

They must increase their equity funding to protect against the next unexpected shock

Neel Kashkari 

A man walks past the New York Stock Exchange. Absent authorities’ fiscal interventions, banks’ losses would have been much larger © Mark Lennihan/AP


In the early stages of the pandemic I called for large US banks to raise $200bn of equity capital as a preventive measure to ensure they would have the financial wherewithal to endure a severe Covid-induced downturn.

Small businesses across America, which had been forced to lay off staff, were telling their landlords they would not pay rent until the crisis had passed. 

Those landlords were, in turn, telling their banks they would not be making mortgage payments.

At that point of the Covid crisis, we did not know how the accumulated costs would affect the banking sector. 

Much would turn on how the virus progressed and mutated and how healthcare systems responded.

Banks did not heed my advice. More than a year later, what actually happened? 

The Covid crisis was worse than I feared, with 600,000 deaths in the US alone and the deepest economic downturn in recorded history.

Yet the losses in the banking sector were far smaller than my analysis and, in fact, than the banks’ own loan loss modelling predicted. 

Today, banks argue that they were a source of strength during the crisis and are once again renewing their perennial calls to relax regulations. 

Does their performance during the Covid downturn indicate that large banks are strong enough? 

No, it does not.

The losses in the banking sector were much smaller than expected because governments were so aggressive in providing fiscal support for families and businesses affected by the crisis. 

In the US, Congress allocated almost $6tn in Covid-related support programmes which enabled many businesses to stay solvent and families to pay rent, mortgages, car loans and credit cards, all of which ultimately supported banks’ balance sheets.

Fiscal authorities were right to be so forceful and proactive in supporting the economy during the Covid downturn. 

But this was also a banking bailout. 

Absent these fiscal interventions, losses in the banking sector would have been much larger. 

How much larger? 

It is difficult to know for certain, but by comparing this downturn with losses banks faced in prior recessions staff at the Federal Reserve Bank of Minneapolis estimate it at between $100bn and $300bn. 

These estimates are probably on the low side because, without aggressive government support, it is unlikely that the economy would be recovering nearly as quickly as it is now, and the banks might still be facing losses.

To bring greater transparency to these issues, the Minneapolis Fed has created a tool that allows the public to enter their own assumptions and estimate bank losses under their own scenarios, with and without fiscal support. 

We now face some fundamental policy questions. 

What economic shocks should banks be able to handle on their own? 

And for which shocks is it appropriate to depend upon taxpayer support?

Most people intuitively understand that the Covid crisis was different than the global financial crisis. 

The pandemic was essentially a natural disaster hitting the global economy. 

And banks were no more at fault than airlines or hotel operators.

In contrast, banks had helped to create the conditions that led to the 2008 crisis, having made millions of bad mortgage loans. 

In neither case would the banking sector, in the absence of government support, have been able to withstand the losses on its own and continue to provide credit to the economy. 

In 2008, many large banks faced impending failure, which forced fiscal authorities to step in at the last moment to prevent a banking collapse that could have turned a deep recession into another Depression. 

In the case of the pandemic, fiscal authorities acted aggressively at the outset to support the economy and, in doing so, also rescued the banking sector.

We never know in advance where the next crisis is going to come from, or who will be at fault when it arrives. 

The only tool we have to ensure banks’ resilience is to make sure they have enough equity capital at all times.

Analysis by the Minneapolis Fed and numerous outside experts indicates banks need about 20 per cent equity funding, up from about 13 per cent today, to protect against deep economic downturns, such as another housing bust or pandemic.

Banks fight against such proposals because higher equity levels will hurt their share prices. 

The public must decide: should banks be resilient on their own or always dependent upon the generosity of taxpayers?


The writer, president and chief executive of the Federal Reserve Bank of Minneapolis, oversaw the Troubled Asset Relief Program in 2008-09 

Latin America’s Summer of Discontent

The assassination of Haiti’s president and protests in Cuba this month are in line with a long tradition of summertime crises in the Caribbean. But this year’s political unrest is likely to have more far-reaching effects than previous bouts of instability.

Jorge G. Castañeda


MEXICO CITY – In the Caribbean, summer is when things happen. 

As the weather heats up and hurricanes pass through, passions tend to flare and crises erupt. 

Yet such crises rarely occur in more than one country at a time, and the dangers they pose are generally limited. 

Not this year.

On July 7, armed men stormed the private residence of Haitian President Jovenel Moïse in the middle of the night and shot him dead, shocking the country and setting off a political power struggle. 

Prime Minister Claude Joseph, who has served as acting president since Moïse’s death, has now agreed to hand over power to Ariel Henry, whom Moïse appointed as the country’s next prime minister just two days before being killed. 

But while this could go some way toward defusing the immediate political crisis, the assassination does not bode well for Haiti’s stability or prosperity.

This month has also brought the largest display of dissent in Cuba in decades, with thousands of Cubans taking to the streets to protest deteriorating living conditions and a lack of basic goods, including medicine, during a worsening COVID-19 outbreak. 

Many called for an end to the 61-year-old communist regime.

For policymakers in the United States, a perfect storm seems to be brewing. 

Their worst Latin American nightmare has long been the simultaneous exodus of refugees from Haiti and Cuba toward Miami. 

This prospect is particularly daunting at a time when migrant apprehensions at the US-Mexican border are at their highest level since 2000.

After Haiti’s 1991 military coup, tens of thousands of Haitians set out for the US. 

Today, thousands of Haitians are parked outside the Mexican Refugee Office in Tapachula, on Mexico’s border with Guatemala. 

Several thousand more have formed an increasingly permanent “temporary” camp in Tijuana. 

While US Secretary of Homeland Security Alejandro Mayorkas has warned Haitians not to attempt to enter the US, many are likely to ignore him.

In the case of Cuba, US officials might have even more reason to worry. 

In 1965, during one of the first economic crises after the Cuban revolution, Fidel Castro allowed the Swiss government and US President Lyndon B. Johnson’s administration to operate so-called Freedom Flights, which took thousands of Cubans to Miami.

In 1980, the Mariel boatlift – again masterminded by Castro – brought 125,000 Cubans from all walks of life to Miami, though some ended up in a military compound in Arkansas. 

In 1994, after the maleconazo riots, Castro announced that anyone who wanted to leave the country could. 

So, between 25,000 and 40,000 Cubans set out for Miami in makeshift rafts, with many ending up at the US Naval Base in Guantánamo.

Sending Cubans packing after mass protests has been the regime’s standard operating procedure. But this approach may no longer be enough to defuse domestic tensions. 

For starters, Fidel is dead, and his brother, Raúl, who had been running the country since 2006, retired in April. I knew Fidel, and Raúl is no Fidel. 

Neither he nor Miguel Díaz-Canel, who succeeded Raúl as president and head of the Communist Party, has the charismatic bond with the Cuban people that Fidel had, for better or for worse.

Moreover, the economic crisis Cuba is facing today may be even more severe than during the “Special Period” after the Soviet Union’s collapse. 

January’s maxi-devaluation has triggered hyperinflation, output is paralyzed, and restrictions on remittances and tourism from Miami imposed by former President Donald Trump’s administration remain in place. Virtually everything Cubans need is scarce. 

People wait in long lines to purchase basic goods and suffer through power outages in the sweltering summer heat. Meanwhile, the pandemic is raging.

Cubans see no light at the end of the tunnel. 

Even if the government pursued radical economic reforms – such as large-scale privatization, financed by resources from the Cuban diaspora, or complete import liberalization – the results would hardly be immediate.

A final distinctive characteristic of the current crisis is the role of social media. 

While its importance has often been exaggerated, its expanded availability in Cuba since then-President Barack Obama’s diplomatic normalization in 2016 has clearly made a difference. 

Protesters can now communicate with one another, sharing practical information, slogans, photos, and songs. 

And they can share their experiences with the rest of the world in real time.

There is no greater testament to social media’s impact than the Cuban government’s decision on July 11 to shut down the internet – a policy that has yet to be fully reversed. 

Now, the US is reviewing whether it can help restore internet access for Cubans using offshore satellite technology.

Of course, the Cuban regime also used good old-fashioned repression. 

Counter-demonstrators, police (and perhaps even military personnel in civilian clothes), and thugs armed with sticks managed to disperse the crowds and prevent new demonstrations. 

Hundreds of protesters – more than 500, according to Human Rights Watch – were detained.

Crucially, the government has avoided deploying the armed forces – at least so far. 

Such a move would present military personnel with a stark choice: fire at the crowd, if the order comes, or join it. 

Either would mean the end of the Cuban regime as we know it.

But change is probably underway in Cuba, anyway. 

The younger generation of officials knows that the current situation is unsustainable. 

Any hope they had of reforming the economy, without also reforming the political system, has been dashed.

If real change does come to Cuba, all of Latin America will feel the effects. 

As it stands, left-of-center candidates have already won or are set to win presidential elections in Brazil, Chile, Colombia, and Peru. 

All of these candidates are, to some extent, carrying Cuba’s baggage. 

An end to the communist regime there would enable, if not compel, the Latin American left to come to terms with its authoritarian past and predilections.


Jorge G. Castañeda, a former foreign minister of Mexico, is a professor at New York University and author of America Through Foreign Eyes. 

Latin America’s Perfect Storm

The mass protests that have recently erupted in countries as different as Colombia and Cuba attest to the severity of the crises facing Latin America. Although the region's problems must be addressed above all by its leaders, increased international cooperation will be vital to reviving economic growth and political stability.

Javier Solana, Enrique V. Iglesias


MADRID/MONTEVIDEO – Latin America is experiencing an especially grave set of crises. 

The region’s economies are stagnating. 

Its politics are broken. 

And, above all, the health of its people is in jeopardy. 

The mass protests that have recently erupted in multiple countries attest to the severity of the problems that the region’s leaders and the international community must now tackle.

Despite accounting for just over 8% of the world’s population, Latin America has recorded more than 30% of confirmed COVID-19 deaths. 

With a few exceptions, vaccination in the region is still proceeding painfully slowly. 

In Peru, which has one of the world’s highest COVID-19 death rates, only about 20% of the population has received at least one vaccine dose.

The region’s economy shrank by 6.3% in 2020 because of the pandemic, but Latin American countries had already been performing anemically for the previous five years. 

They are also among the world’s most unequal countries, creating an ideal breeding ground for both COVID-19 and the virus of political instability.

Fatalism about Latin America is counterproductive, however, because it masks the heterogeneity of the region’s societies and institutions. 

But we cannot ignore the historical and structural factors behind the region’s late modernization, nor its tendency toward social and political volatility, as proven by its trajectory over the past 30 years.

Latin America’s democratic surge in the early 1990s, together with a commodity boom a decade later, resulted in an expansion of the region’s middle classes and seemed to suggest that the cycle of underdevelopment had been broken. 

But the end of the upswing in commodity prices in the 2010s wiped out much of this economic advance and roiled the region’s societies and politics.

Worryingly, the middle classes now fear a return to poverty and have lost their self-confidence. 

Their gnawing economic anxiety has eroded their support for democratic institutions and cleared the ground for a revival of populism on both the right and the left. 

Civil liberties and the rule of law are now under threat, and Latin America’s global standing has inevitably suffered.

At the same time, Latin America’s abundant mineral, energy, and agricultural resources continue to attract the attention of the world’s major powers, reflected in the region’s increasing trade, investment, and financial cooperation with China. 

Although the 2000s raw-materials boom also was partly driven by Chinese demand, Latin America today is in a more exposed and dependent position, aggravated by the pandemic.

Latin America’s problems must be addressed above all by its own leaders. 

The most pressing priority – beyond the fight against COVID-19 – is to promote a new social contract, which should aim to mitigate inequality and improve access to health care, education, and other pillars of the welfare state. 

The changes must be deep enough to restore dignity to politics, thus reviving popular support for democratic institutions.

But political leaders cannot undertake this task alone. 

More fluid collaboration with the private sector and civil society would make it possible to maximize the opportunities that digital transformation offers and provide stronger guarantees to help manage its impact on labor markets.

At the same time, Latin American countries would do well to accelerate their regional integration, which has long been on the backburner. 

The new frontiers of technology, communications, and education can help to strengthen inter-American ties, primarily with regard to trade (as demanded by most citizens across the region).

From a wider perspective, Latin America must be regarded as a key political and economic actor, capable of altering the global balance of power. 

And with 40% of the world’s species, 30% of its freshwater reserves, and 25% of its forests, the region should play a vital role in the multilateral fight against climate change. 

But that will be impossible so long as the pandemic is undermining its economies and political stability.

International organizations have responded to the COVID-19 crisis by providing more funding. 

But it is still not enough for developing countries, which need more flexible access to long-term, low-interest financing. Some initiatives demanded by Latin American and other developing economies focus on creating liquidity to mitigate the pandemic’s social impact and help firms whose survival is threatened.

Likewise, Latin America and its traditional allies would benefit from devising new forms of cooperation. 

The United States is particularly well-equipped to help countries in its neighborhood, such as those in Central America and the Caribbean. 

And the links between Latin America and Europe, a legacy of colonialism and subsequent migration, are also strong.

But Europe must reach out more decisively to Latin America. 

Aside from cultural affinity, a convergence of interests – such as curbing the pandemic, mitigating climate change, promoting economic prosperity, and complementing the influence of other powers – makes greater engagement a geostrategic imperative. 

Concluding the European Union’s free-trade agreement with Latin America’s Mercosur bloc (Argentina, Brazil, Paraguay, and Uruguay) would represent a tangible and highly significant advance.

When the Colombian writer Gabriel García Márquez accepted the 1982 Nobel Prize in literature, he delivered a lecture entitled “The Solitude of Latin America.” 

He said that “those clear-sighted Europeans who struggle, here as well, for a more just and humane homeland, could help us far better if they reconsidered their way of seeing us.” 

After all, “Solidarity with our dreams will not make us feel less alone, as long as it is not translated into concrete acts of legitimate support for all the peoples that assume the illusion of having a life of their own in the distribution of the world.”

In these times of shared – though unequally distributed – hardships and afflictions, García Márquez’s wise words challenge us all, Europeans and non-Europeans alike. 

The pandemic and its economic and political fallout must imprint two messages in our minds: No one is safe from global threats, and no one should be left to face them alone.


Javier Solana, a former EU high representative for foreign affairs and security policy, secretary-general of NATO, and foreign minister of Spain, is President of EsadeGeo – Center for Global Economy and Geopolitics and Distinguished Fellow at the Brookings Institution.

Enrique V. Iglesias is a former president of the of the Inter-American Development Bank.

NASA’s InSight Lander Gives First Look at Mars Interior, Yielding a Big Surprise

Analysis of marsquakes detected by space agency reveals a planet with a large molten region and inner structures markedly different from Earth’s

By Robert Lee Hotz and Merrill Sherman

This artist's concept depicts NASA’s InSight lander after it deployed its instruments on the Martian surface. NASA/JPL-CALTECH


NASA-funded researchers said Thursday they had mapped the interior of Mars, using seismic data collected by the agency’s Mars InSight lander to reveal a planet with a molten core whose size and composition came as major surprises.

The interior map—the first ever created of another planet—shows that the internal structure of Mars differs dramatically from Earth’s. 

Mars has a thicker crust and a thinner underlying mantle layer as well as a core that is bigger, less dense and more liquid than the researchers had expected.

The scientists said their findings, which were described in three papers published Thursday in the journal Science, suggest that Mars formed millions of years before Earth, when the sun was still condensing from a cloud of glowing gas.

“It gives us our first sample of the inside of another rocky planet like Earth, built out of the same materials but very, very different,” Sanne Cottaar, a seismologist at the U.K.’s University of Cambridge, said of the new research. “It is impressive.”

Dr. Cottaar, who wasn’t involved in the new research, called the findings “a major leap forward in planetary seismology.”

The new in-depth portrait of Mars was assembled by an international team of more than 40 scientists working at research centers from Pasadena to Moscow.

The scientists peered into the innards of the red planet using French-built seismometers on board the space agency’s $828 million InSight lander, which in 2018 landed on a smooth plain along the Martian equator called Elysium Planitia.

The instruments captured detailed information about hundreds of marsquakes, including the way the vibrations caused by the alien temblors were reflected and refracted by subsurface layers to reveal their positions and densities.

“The clues don’t lie on the surface,” said Amir Khan, a geophysicist at the University of Zurich in Switzerland and a member of the research team. 

“You have to look inside for the fundamental building blocks that make a planet: the crust, the mantle, the core and the separation of materials that happens as the planet forms.”

The InSight lander has recorded more than 700 marsquakes since beginning operations in February 2019, fewer and less intense than the scientists had expected.

Even the strongest of them, registering at about magnitude 4.0, would barely rattle the windows on Earth. 

The largest quake on Earth in 2020—a magnitude 7.8 temblor that struck Perryville, Alaska—was about 6,000 times more powerful than the biggest marsquake recorded by InSight.

Mars is so seismically stable that InSight’s sensors were able to detect tiny shivers from faults thousands of kilometers away, the scientists said. 

“It is a testament to the quietness of Mars,” said team leader Mark Panning, InSight project scientist at NASA’s Jet Propulsion Laboratory in Southern California. 

“You would never get that quiet on Earth because, no matter where you go, the oceans are always making seismic noise.”

The research showed that the core of Mars has a radius of nearly 1,137 miles (1,830 kilometers) and extends about midway to the planet’s surface. 

As best as the scientists can tell, the molten core isn’t very dense and likely contains a mixture of light elements such as hydrogen, oxygen, carbon and sulfur.


Wrapped around the core is a relatively thin mantle, composed perhaps of just two or three rocky layers. 

These are topped by an unusually thick and rigid outer shell of upper mantle and crust, called the lithosphere, which the scientists said seems to be two or three times thicker than a similar formation on Earth. 

The crust itself was found to have a thickness of between 14 and 44 miles (24 and 72 kilometers).

But Mars might not have given up all its structural secrets. 

The scientists discovered that the rocky soil beneath the lander dissipates seismic energy, meaning that the 794-pound, solar-powered craft may be located within a vast seismic “shadow” where some marsquakes might elude detection.

The new findings from InSight come as NASA’s six-wheeled Perseverance rover prepared to collect its first samples of Martian rock at its landing site, located 2,100 miles from InSight in the Jezero crater. 

Plans call for the $2.7 billion rover to collect up to 43 samples that might contain chemical traces of ancient microbial life—if any ever existed on the now-barren planet—for eventual transport back to Earth.

In this artist’s concept of NASA's InSight lander on Mars, layers of the planet's subsurface can be seen below and dust devils can be seen in the background. / PHOTO: IPGP/NICOLAS SARTER


InSight has been struggling in recent months, as wind-whipped Martian dust collected on its solar panels and cut their ability to generate electrical power. 

In May, NASA engineers directed the probe’s digging tool to pile sand on the lander’s deck so that the wind would blow it across the solar panels and, like a whisk broom, sweep away the dust.

“We dump sand on ourselves to get rid of dust,” Dr. Panning said, adding that the fix seemed to be working.

The lander recently was granted a two-year extension for scientific work, now lasting until the end of 2022.

Asia gold ETFs buck trend and attract strong inflows

US and European funds instead suffered outflows of $8.5bn and $3.6bn respectively in the first half of the year

Chloe Leung, Ignites Asia

China accounted for the highest proportion of the flood of money into Asian gold ETFs © Bloomberg


Gold exchange traded funds have continued to attract strong inflows in Asia this year, as many investors hedge against concerns of widespread inflation and protect against uncertainties around the trajectory of the pandemic and economic recovery.

As of end-June, Asia-domiciled gold ETFs had posted net inflows of $1.6bn, making it the only region to register net inflows. 

China, India and Hong Kong-domiciled gold ETFs have been the main driver of the inflows.

In contrast, there were signifcant outflows from the funds in the US and in Europe, with total net outflows reaching $8.5bn and $3.6bn respectively over the same period, according to Morningstar data.

China accounted for the highest proportion of the flood of money into Asian gold ETFs, with 10 funds raking in more than $651m during the first half of 2021. 

The best-selling Chinese ETF, HuaAn Fund Management’s Huaan Gold ETF Fund, which has $1.7bn in assets under management, contributed inflows of $304m.

Investors in Hong Kong and India also poured money into gold ETFs. 

While 11 funds domiciled in India had net inflows of $371m, four gold ETFs in Hong Kong had net inflows of $270m.

The strong inflows come after a similarly strong performance last year when Asia-domiciled gold ETFs posted inflows of $3.4bn of which India contributed $898m, China $860m and Japan $434m.

Fears of a return to high inflation have risen recently as countries open their economies after the pandemic and spending resumes. According to the International Monetary Fund, the global inflation rate rose to 3.5 per cent in 2021 from 3.2 per cent in 2020.

Robin Tsui, Hong Kong based Asia-Pacific gold strategist for State Street SPDR ETFs, said the continued inflows into Asia-listed gold ETFs in 2020 were being driven by multiple factors.

These include loosening monetary policy globally, the weakness of the US dollar, uncertainty around Covid-19 and the decline in real yields, all of which had benefited gold prices and pushed up demand for gold ETFs.

The price of gold rose 28 per cent in the first half of 2020, before dipping from its August peak. 

The price started to go up again in February this year. 

It stood at $1,815 per ounce on July 6 from $1,522 per ounce at the start of 2021.

Leena Dagade, Singapore-based associate director at Cerulli, said that investors had also been attracted to gold ETFs because of their “safe haven appeal” during the market volatility last year.

She said investors “still continue to allocate some portion of their assets to gold for its role in uncertain times and as a portfolio diversification tool”.

Tsui said prospects for Asian gold ETFs still looked “bright”.

He said Asian investor assets continued to grow and there was more interest among both intermediaries and institutional investors in understanding gold investments as part of a strategic asset allocation approach.

“The investment appeal of gold for Asian investors remains strong relative to other regions,” he said.

Central banks around the world are anticipating an increase in gold reserves over the next 12 months, with most citing “uncertainty over economic recovery from the Covid-19 pandemic” as their reason for buying gold, according to a survey prepared by the World Gold Council.


Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com

Gold & Basel III’s Trillion-Dollar Question

By Matthew Piepenburg


June 28th has come and gone, which means the much-anticipated Basel III “macro prudential regulation” to make so-called “safe” banks “safer” has officially kicked off in the European Union (as it will on July 1 for U.S. banks and January 1, 2022 for UK banks).

The trillion-dollar question for gold investors is now obvious: What next?

The short answer is:  Gold will rise, but don’t expect a straight line or zero discomfort/volatility.

The longer answer, however, deserves a bit more context, unpacking and plain-speak; so, let’s roll up our sleeves and start from the beginning.

What is Basel III?

Basel III is essentially a long-delayed, controversial and internationally agreed-upon banking regulation which now, among other things, requires commercial banks to change their “net stable funding ratio” for gold held as a tier 1 asset on their balance sheet from 50% to 85% to make banks “stronger and more resilient in times of crisis.”

(Hidden premise: Are the BIS and its regulated banks worried about another “crisis”?)

Translated into non-banker English, for each asset a bank buys, they have to insure “stable funding” (as opposed to repo money, demand deposits or excess leverage) to buy/lever more stuff…

Translated even more simply, banks can’t use as much “maturity transformation” or “duration mismatches”—i.e., leverage and short-term money for long-term speculation (arbitrage)—to buy and sell precious metals, among other things.

Basel III, in essence, is requiring banks to engage in longer (rather than shorter-term) lending, and in a nutshell, this makes it far more expensive for banks to own “unallocated” gold, as most of the gold they owned in the past was just tier 3 paperlevered to the moon.

Getting back to more banker-speak, Basel III is an open move that requires banks to de-lever (slow down) their trade in paper gold.

This is accomplished by requiring/regulating banks to classify their actual physical gold holdings (bars or coins) as tier-1 (real/safe) assets and their paper gold holdings as tier 3 (levered, unsafe) assets, against which greater reserves will be required.

Translated once again into actual practice, Basel III means there will be a lot less banking leverage of, say a 400-ounce bar of gold (200:1 in 2016, to just 3:1 today) in the COMEX market, which market is slowly being transformed from a derivative-supported (i.e., levered) speculators’ exchange to a far more collateralized exchange.

Is Basel III Making the World Safer for Honest Banking?

Seems like a good thing, right? 

Less margin, less tier 3 risk, more “stable” assets, more reserves, safer banking practices, stronger bank balance sheets to protect depositors and, hey, perhaps even some actual and honest price discovery for precious metals?

Well…Yes and No.

Yes, the new regs will force greater liquidity requirements (“Net Stable Funding Ratios”) on banks, thereby preventing them from saying (falsely) that they have gold when in fact all they had was a lot of levered paper and more than one owner for the physical gold they did have.

But no, this will not lead to banks suddenly going on a forced buying spree (and skyrocketing price move) to replace all their old tier 3 paper gold with shiny new real, physical tier 1 gold to meet the new reserve requirements.

Despite this, many have made hay online claiming such an instant price rise would follow, but as we’ve said before, banks may be greedy, levered and dishonest, but they aren’t stupid, unprotected or suicidal…

That is, they’ve known these regs were coming and weren’t in any hysterical panic to nervously collect their pennies and suddenly buy more tier 1 gold and silver to meet the new reg percentages.

Not at all.

What many on the pundit-circuit and YouTube universe failed to remind their audience was that well before Basel III’s “reserve requirements” went live, those very same banks were already sitting on plenty of excess reserves thanks to prior bailouts (think 2008…).

In the U.S. banking sector, for example, the big boys were already well positioned with over $1.6T in excess reserves, yet all that is needed to meet Basel III is another $400B.

In short, banks are not even close to worrying about a forced purchase of more gold to meet Basel III reserve percentages; instead, they can simply allocate a portion of their fat excess reserves (compliments of you the tax-payer and forced bailout sponsor) to meet the new regs.

Re-Arranging (“Classifying”) the Deck Chairs on the Titanic

But what we do know from Basel III is that all that unallocated paper gold on the banks’ prior balance sheets needs to be re-considered, re-shuffled and re-classified.

In plain speak for non-bankers (i.e., the rest of us mortals), this means the banks need to make some decisions.

That is, will they set aside more money to buy physical gold to replace the paper gold, or will they simply reduce the size and scope of their old bullion business?

Take a wild guess…

As noted above, if you were expecting banks like Citi Group and Morgan (JP or Stanley) to suddenly convert all their tier 3 paper gold into tier 1 physical gold to make the 85% quota, think again.

Instead, they’ll be dumping a lot of the paper gold rather than spark some immediate price surge in the physical market.

In other words, banks will be reducing the size and scope of the precious metal trade, which adds to the cost of lending to every player in the gold and silver space–from coin shops to mining co’s.

Trading will tighten and clearing costs will rise to match the wider bid-ask spreads as gold and silver becomes less liquid, which could make institutional investors less interested in precious metals for no other reason than liquidity will be harder and spreads wider.

Suffice it to say, banks will always follow the path that is best for themselves and more onerous for gold in general and the rest of us little guys (i.e., anyone who isn’t a bank) in particular.

In short, expect a lot less bullion clearing services and hence much higher trading costs from the primary dealer banks.

But what does that have to do with the Trillion-dollar question—namely the future direction of gold and silver pricing?

Good question.

Basel III and Precious Metal Pricing

A. The Bearish/Cynical Take

As the traders say, buy the rumor and sell the news.

For the last three months, as Basel III rumors spread, gold saw a great deal of short covering and price upticks.

But once the so-called Basel III “news” approached the June 28 deadline, the selling kicked in on que and gold saw expected falls, which should be classic dip-buying signals for far-sighted investors.

Near-term, the fact that banks are reducing their bullion trades (or re-arranging their unallocated/tier 3 gold and allocated tier 1 gold) is not exactly a bullish signal for gold.

In the UK, for example, the very perturbed LBMA banks live and breathe primarily in the clearing and settling of unallocated, “paper” gold and silver—i.e., the very tier 3 assets most impacted by Basel III.

As indicated above, the UK’s regulatory clock starts ticking in January, so we can expect some serious stress (i.e., lower volume) in the soon-to-be beleaguered LBMA market in 2022.

For true cynics, it’s tempting to simply see Basel III as a clever way for the BIS and their central and commercial bank minions (think Deutsche Bank) to create a tightened gold trade designed to stifle gold market activity/lending and hence shield their otherwise worthless fiat currencies, as nothing scares broke sovereigns and fake currencies more than rising gold prices.

Furthermore, Basel III creates a convenient setting to push gold down and thus allow banks to front run the dip and buy more of the same at lower prices. Such cheating is nothing new from the big banks…

Fair point—from a cynic like myself.

But let’s stick to what we know in real time.

In particular, we can assert that the smaller players and traders in the gold space are about to feel a tight and painful pinch in everything from liquidity to loan terms.

Thus, for smaller enterprises in the gold sector (miners, mints, jewelers and refiners for example) who rely upon inexpensive and readily available liquidity (or loan terms), many will, as always, get priced out by the big players or loan-averse banks as more consolidation in this otherwise shrinking trading/lending universe takes place.

And as for gold traders hoping to go long to actual delivery on futures contracts with tight spreads, they’ll quickly discover that thanks to Basel III, they won’t be able to afford/use leverage to take physical delivery, but will instead have to keep rolling their contracts at a much higher price and wider spread.

Why?

Because unlike banks, whose cost of capital is zero, normal traders won’t be given a margin account from those same (and newly regulated) banks to pay for actual delivery.

That’s why the big banks banks are natural gold shorts: They know most traders can’t go long to full delivery.

In other words, the cost (as well as widening bid-ask spreads) of clearing and settling precious metal trades, as well as the cost of borrowing (and hedging) for miners and refiners in this sector will rise considerably as banks push the rising costs down the food chain while making profits on what is effectively their own “insiders arbitrage.”

Such shrinkage in bank “precious metal departments” could make gold less attractive to certain parties (expect far less players in the LBMA pitch), and hence push precious metals downward.

B. Some Volatility & Bullish Inevitability

On the bullish side, however, a smaller precious metals market combined with more demand and higher transactional costs can send prices higher, not lower.

Furthermore, the fact that Basel III reclassifies physical, or allocated, gold as a tier 1, zero-risk asset, means more banks (commercial and central) are likely to increase their vaulted positions of gold and silver.

That’s bullish.

But as already noted, be it forward contracts in London or futures contracts on COMEX, banks will clearly be less encouraged or voluminous in the precious metal trade.

For this reason, I, and many others, expect greater price volatility in gold and silver, but ultimately far better price discovery when the myriad other gold tailwinds of which we’ve written (i.e., rising inflation, negative real rates, central bank loan guarantees, expanding money supply and a falling dollar) outside of Basel III send gold demand (and hence gold prices) naturally higher.

With the Basel III regs in place in such a macro tailwind environment for gold, there will be far less big-bank paper-shorts impacting silver and gold’s natural price rises going forward.  

This means actual price discovery as opposed to artificial price fixing by the COMEX’s big banks.

Thus, if the BIS was hoping to discourage gold via Basel III, they may want to be careful what they ask for, as their plan is likely to backfire as the rest of the world’s currencies are already on fire and burning to ash.

Putting It Together

In sum, there is a wide arc of opinions and possibilities as to the near-term and longer-term impact of Basel III on gold and silver pricing.

As stated above, we can expect increased price volatility, and even further declines in precious metals, but longer term, the arc of history, improved price discovery and the good ol’ natural laws of supply and demand make gold an undeniably critical asset going forward.

At Matterhorn Asset Management, we serve sophisticated precious metal investors and wealth preservation clients, not speculators, pattern traders or trend followers.

As such, near-term price moves on the backs of headline-making regulations never detract us, or our clients, from the blunt recognition that the global financial system in general, and global currencies in particular, are heading nowhere but downward.

Gold is insurance against a system already on fire.

Ironically, the very fact that the Basel III regs are making noise today is just further evidence of this ultimate direction.

That is, the fear (as well as unspoken realization) that the very financial system which the BIS and others have mis-managed for years is now at risk-levels never seen before in history precisely explains what prompted Basel III’s arrival today after so many false starts yesterday.

In other words, the very architects of the global financial crisis (an unprecedented global debt disaster coupled with a risk-asset mega bubble) are worried about the catastrophe they alone created and which they can no longer pin on the COVID (fiasco).

Unlike those “banking experts,” we in Zurich have always played the long game not the putting green.

Regardless of whether Basel III brings near-term mayhem or calm to the gold markets, we have zero doubts that the only assets to bring individual calm to such global mayhem in this broken financial setting are the very same assets the big boys are currently doing their best to “regulate,” namely: Gold and silver.

Ironically, and despite even Basel III’s attempt to make allocated gold a risk-free priority over unallocated paper gold on their own balance sheets, we also know, and have know for decades, that even the “allocated” gold held by their bank customers is not in fact owned by the customers, but by the banks themselves.

That’s why we store our clients’ fully-insured precious metals outside of this fractured and band-aid regulated banking system in secured vaults where the gold is held and marked in client names, not ours.

Alas: Zero counter-party risk, 100% ownership.

Stated otherwise, we’ve been thinking way ahead of the bankers and their regulators for years.

Amidst all this noise are simple guideposts.

We knew physical gold was a “safe asset” long before Basel III made it tier 1 official; we also knew, like many other sophisticated investors, that “non-yielding” physical gold was a far superior asset than negative yielding sovereign bonds (i.e., “return-free risk”)…

Heck, even the central banks themselves can’t deny this, which is why they’ve been purchasing more gold than Treasuries.


In short, what banks do and what they say are very different things. 

Basel III is just another attempt to make the unsafe appear safe, whereas we’ve been safe (and more prepared) all along. 

Techno-Feudalism Is Taking Over

The claim that capitalism is being toppled by a new economic mode comes on the heels of many premature forecasts of capitalism’s demise, especially from the left. But this time it may well be true, and the signs that it is have been visible for a while.

Yanis Varoufakis


ATHENS – This is how capitalism ends: not with a revolutionary bang, but with an evolutionary whimper. 

Just as it displaced feudalism gradually, surreptitiously, until one day the bulk of human relations were market-based and feudalism was swept away, so capitalism today is being toppled by a new economic mode: techno-feudalism.

This is a large claim that comes on the heels of many premature forecasts of capitalism’s demise, especially from the left. But this time it may well be true.

The clues have been visible for a while. 

Bond and share prices, which should be moving in sharply opposite directions, have been skyrocketing in unison, occasionally falling but always in lockstep. 

Similarly, the cost of capital (the return demanded to own a security) should be falling with volatility; instead, it has been rising as future returns become more uncertain.

Perhaps the clearest sign that something serious is afoot appeared on August 12 last year. 

On that day, we learned that, in the first seven months of 2020, the United Kingdom’s national income had tanked by over 20%, well above even the direst predictions. 

A few minutes later, the London Stock Exchange jumped by more than 2%. 

Nothing comparable had ever occurred. 

Finance had become fully decoupled from the real economy.

But do these unprecedented developments really mean that we no longer live under capitalism? 

After all, capitalism has undergone fundamental transformations before. 

Should we not simply prepare ourselves for its latest incarnation? 

No, I do not think so. 

What we are experiencing is not merely another metamorphosis of capitalism. 

It is something more profound and worrisome.

Yes, capitalism has undergone extreme makeovers at least twice since the late nineteenth century. 

Its first major transformation, from its competitive guise to oligopoly, occurred with the second industrial revolution, when electromagnetism ushered in the large networked corporations and the megabanks necessary to finance them. 

Ford, Edison, and Krupp replaced Adam Smith’s baker, brewer, and butcher as history’s prime movers. 

The ensuing boisterous cycle of mega-debts and mega-returns eventually led to the crash of 1929, the New Deal, and, after World War II, the Bretton Woods system – which, with all its constraints on finance, provided a rare period of stability.

The end of Bretton Woods in 1971 unleashed capitalism’s second transformation. 

As America’s growing trade deficit became the world’s provider of aggregate demand – sucking in the net exports of Germany, Japan, and, later, China – the US powered capitalism’s most energetic globalization phase, with a steady flow of German, Japanese, and, later, Chinese profits back into Wall Street financing it all.

To play their role, however, Wall Street functionaries demanded emancipation from all of the New Deal and Bretton Woods constraints. 

With deregulation, oligopolistic capitalism morphed into financialized capitalism. 

Just as Ford, Edison, and Krupp had replaced Smith’s baker, brewer, and butcher, capitalism’s new protagonists were Goldman Sachs, JP Morgan, and Lehman Brothers.

While these radical transformations had momentous repercussions (the Great Depression, WWII, the Great Recession, and the post-2009 Long Stagnation), they did not alter capitalism’s main feature: a system driven by private profit and rents extracted through some market.

Yes, the transition from Smithian to oligopoly capitalism boosted profits inordinately and allowed conglomerates to use their massive market power (that is, their newfound freedom from competition) to extract large rents from consumers. 

Yes, Wall Street extracted rents from society by market-based forms of daylight robbery. 

Nevertheless, both oligopoly and financialized capitalism were driven by private profits boosted by rents extracted through some market – one cornered by, say, General Electric or Coca-Cola, or conjured up by Goldman Sachs.

Then, after 2008, everything changed. 

Ever since the G7’s central banks coalesced in April 2009 to use their money printing capacity to re-float global finance, a deep discontinuity emerged. 

Today, the global economy is powered by the constant generation of central bank money, not by private profit. 

Meanwhile, value extraction has increasingly shifted away from markets and onto digital platforms, like Facebook and Amazon, which no longer operate like oligopolistic firms, but rather like private fiefdoms or estates.

That central banks’ balance sheets, not profits, power the economic system explains what happened on August 12, 2020. 

Upon hearing the grim news, financiers thought: “Great! The Bank of England, panicking, will print even more pounds and channel them to us. Time to buy shares!” 

All over the West, central banks print money that financiers lend to corporations, which then use it to buy back their shares (whose prices have decoupled from profits). 

Meanwhile, digital platforms have replaced markets as the locus of private wealth extraction. 

For the first time in history, almost everyone produces for free the capital stock of large corporations. 

That is what it means to upload stuff on Facebook or move around while linked to Google Maps.

It is not, of course, that traditional capitalist sectors have disappeared. 

In the early nineteenth century, many feudal relations remained intact, but capitalist relations had begun to dominate. 

Today, capitalist relations remain intact, but techno-feudalist relations have begun to overtake them.

If I am right, every stimulus program is bound to be at once too large and too small. 

No interest rate will ever be consistent with full employment without precipitating sequential corporate bankruptcies. 

And class-based politics in which parties favoring capital compete against parties closer to labor is finished.

But while capitalism may end with a whimper, the bang may soon follow. 

If those on the receiving end of techno-feudal exploitation and mind-numbing inequality find a collective voice, it is bound to be very loud.


Yanis Varoufakis, a former finance minister of Greece, is leader of the MeRA25 party and Professor of Economics at the University of Athens.