HQLA EXPLAINED

Key questions answered

What is an HQLA and where did it come from?

High Quality Liquid Assets (HQLAs) 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.

The concept of HQLA was introduced as part of global banking reforms following the 2008 global financial crisis. Regulators recognised that banks needed stronger and more dependable liquidity buffers, so the Basel III framework formally defined HQLA and set out how much of these assets banks must hold.

Assets must meet a set of criteria to qualify as HQLA. These criteria are set out below.

HQLA Characteristics

Basel definition

High credit standing of the issuer and a low degree of subordination increases an asset’s liquidity. Low sensitivity to interest rate and market risk, low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all enhances an asset’s liquidity.

Qualification

Gold has a long history as money and a store of value. Gold does not have an issuer counterparty credit risk as there is no issuer. As gold is denominated in US Dollars, it is naturally sensitive to changes in US Dollar interest rates. There is low market risk due to the large size of the market (US$361bn average daily trading volume in 2025) and the many global trading venues available. One of gold’s main uses is a hedge against fiat currency inflation.

Basel definition

An asset’s liquidity increases if market participants are more likely to agree on its valuation. Assets with more standardised, homogenous, and simple structures tend to be more fungible, promoting liquidity. The pricing formula of a high-quality liquid asset must be easy to calculate and not depend on strong assumptions. The inputs into the pricing formula must also be publicly available. In practice, this should exclude most structured or exotic products.

Qualification

Multiple sources of valuation are freely available and easily accessible. There are two daily London Gold Auctions (LBMA Gold Price) that provide a spot valuation. Futures valuations for each delivery month are published by the respective exchanges each day, with CME being the largest futures market. Additionally, OTC, ETF and futures markets offer tick data throughout the day via Refinitiv tradeable OTC venue data as well as exchange traded data.

Basel definition

The stock of HQLA should not be subject to wrong-way (highly correlated) risk. For example, assets issued by financial institutions are more likely to be illiquid in times of liquidity stress in the banking sector.

Qualification

Baur et al., (2025) highlights gold’s low or often negative correlations with other HQLAs and non-HQLA assets in order to demonstrate its diversity attributes as one of the best negative correlation assets in times of financial stress and financial liquidity squeezes.

Basel definition

Being listed increases an asset’s transparency.

Qualification

Gold futures and options are listed on a host of global exchanges including Chicago Mercantile Exchange, Shanghai Gold Exchange, Shanghai Futures Exchange, amongst others. There are many listed gold ETFs, with GLD being the largest. Additionally, there are transparent data sets available for post trade LBMA OTC data demonstrating the size and depth of the OTC market.

Basel definition

Assets whose prices remain relatively stable and are less prone to sharp price declines over time will have a lower probability of triggering forced sales to meet liquidity requirements. Volatility of traded prices and spreads over benchmarks are simple proxy measures of market volatility. There should be historical evidence of relative stability of market terms (e.g. prices and haircuts) and volumes during stressed periods.

Qualification

Over the long-term, the volatility of gold compares favourably to other level 1 HQLAs such as 30-year US Treasuries. Over the medium term, the price impact for gold is generally similar to 10-year US Treasuries and better than the largest US equity market index, the S&P 500. During stress periods, volatility analysis of the March 2023 SVB banking crisis highlights that gold's volatility is more stable than that of many US government bonds.

Basel definition

Historically, the market has shown tendencies to move into these types of assets in a systemic crisis. The correlation between proxies of market liquidity and banking system stress is one simple measure that could be used.

Qualification

Gold has a negative correlation with equities and other risk assets. Investment in gold tends to increase when there is systemic risk. This can be measured using gold vs VIX. Baur et al., (2025) examined gold’s Amihud illiquidity measure for the period Feb 13,2023 – June 26, 2024: gold is remarkably liquid with an Amihud measure of 0.102 compared with US Treasury bonds with Amihud measure estimates ranging from 0.055 (3–5-year bonds) to 1.321 (10–20-year bonds). The results are qualitatively similar for the March 2023 (SVB banking crisis) sub-sample.

Basel definition

The asset should have active outright sale or repo markets at all times. This means that:

  1. There should be historical evidence of market breadth and market depth. This could be demonstrated by low bid-ask spreads, high trading volumes, and a large and diverse number of market participants. Diversity of market participants reduce market concentration and increases the reliability of the liquidity in the market.
  2. There should be robust market infrastructure in place. The presence of multiple committed market makers increase liquidity as quotes will most likely be available for buying or selling HQLAs.

Qualification

  1. Twice daily Auction prices can be used to fulfil this criterion. Equally, gold’s average total daily trading volume for FY2025 was US$361bn, of which the London OTC market was US$161bn daily. Examining hourly data over the 2011-2023 period, gold's average bid-ask spreads fall very favourably between those of short-term and long-term US government bonds, the safest and most liquid bonds in the market (Baur et al., 2025).
  2. The global gold market covers a wide range of centres and exchanges. For the London OTC market, there are 11 committed LBMA Market Makers while further liquidity is provided by a diverse range of banks and non-banks.

What is Basel III?

Basel III is an international regulatory framework, primarily aimed at strengthening the global banking system. It's a set of reforms designed to enhance the regulation, supervision, and risk management of banks in response to the global financial crisis of 2007-2008. The framework was developed by the Basel Committee on Banking Supervision (BCBS), a committee composed of bank supervisors from various countries.

What is LCR/NSFR?

In 2013, the European Banking Authority (EBA) was tasked by the European Commission to advise on uniform standard definitions of liquidity assets for the Liquidity Coverage Ratio (LCR) rule.

Two ratios were developed to tackle potential liquidity risks in a stressed market scenario: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). The two calculations were used to set minimum liquidity requirements, intended to reduce liquidity risk and mismatched funding date risk and were incorporated into the Basel III regulations.

Following the Global Financial Crisis, liquidity rules were introduced for the first time.

The Basel Committee on Banking Supervision (BCBS) introduced the classification of High-Quality Liquid Assets (HQLA) as part of Basel III in 2010.

Assets classified as HQLAs are considered to be relatively safe assets to hold within the Liquidity Coverage Ratio (LCR) and Net Stable Funding Requirement (NSFR) rules for banks.

Liquidity Coverage Ratio (LCR)

Banks must constantly hold enough HQLAs to cover potential short-term liquidity needs in the event of a 30-day liquidity crisis.

Net Stable Finding Requirement (NSFR)

Banks must ensure they have enough Available Stable Funding (ASF) to support their Required Stable Funding (RSF) needs.

What is Level 1 and Level 2?

In 2013 the European Banking Authority created their own list of assets that could be used as HQLAs. These were split into different groups according to perceived liquidity characteristics:

Level 1

Extremely High Quality Liquid Assets (e-HQLA) such as Government bonds (or equivalent) 

and cash.

Level 2

These contain less liquid assets such as qualifying covered bonds, corporate bonds, asset-backed securities and equities. Level 2 assets are further split into 2A and 2B.

Level 2A includes certain government securities, covered bonds and highly-rated corporate debt securities.

Level 2B assets include lower-rated corporate bonds, residential mortgage-backed securities and equities that meet certain conditions.

Level 2 assets cannot account for more than 40% of a bank’s HQLA stock. Level 2B assets may not account for more than 15% of a bank’s total HQLA stock.

What are the different weightings of gold within Basel III?

There is often some confusion over the status of gold within Basel III due to the different weightings and ratings that are used within the framework. There are three different weightings relating to gold within the three Basel Accords. They are:

  • 0%: Gold benefits from a 0% rate for Bank Tier 1 capital. Claims secured by allocated gold also have a 0% risk weight under the Risk Weighted Asset credit risk rules. This is the same as for cash and was the same treatment used in the first version of Basel.

  • 20%: The current Basel-based prudential regulatory framework allows clearing houses the ability to accept gold as collateral for margin payments with a haircut of 20%.

  • 85%: As gold sits outside of the HQLA list, it suffers from an 85% required stable funding (RSF) factor and a 0% available stable funding factor under the Net Stable Funding Ratio (NSFR) rules. This is the same RSF factor as corn or lead and was only introduced with the last version of the rules in Basel III.

Gold compares very poorly to Level 2A HQLAs such as high-grade covered bonds at 15% and Level 2B HQLAs such as short-term loans to corporates, some qualifying equities and asset-backed securities at 50%.

Why was gold not included
as HQLA?

When drawing up new regulations in the wake of the Global Financial Crisis, gold was included as an HQLA in 2013 by the Basel Committee on Banking Supervision but subsequently removed, as it believed that it did 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 London Bullion Market Association.