Central bank’s regulations on gold keeping service raises worries Under the draft regulation compiled by the State Bank of Vietnam, commercial banks don’t have to pay back to customers the exact gold bars they entrusted to banks under the safekeeping services.   The draft regulation stipulates that commercial banks must not use the bullion gold customers entrust with them for any purposes, either to convert gold into money, or lend to others. Banks also must not authorize other institutions or individuals to keep gold for them. Commenting about the draft regulation, analysts said the central bank tries to impose a strict management over the gold safekeeping services to ensure that banks cannot use the customers’ gold for their business purposes, which may lead to the banks’ insolvency. According to Tran Thanh Hai, General Director of VGB, a gold investment and trade company, the strict regulation would help prevent banks from mortgaging the gold for short term loans to cover their temporary liquidity problems. However, the central bank allows banks to use the gold bars of some customers to pay to other customers. The provision is believed to make the above said strict regulation nonsensical, because this may be exploited by commercial banks to arbitrarily use the gold for their other business purposes. A banking expert has warned that the draft regulation, if approved, would make the gold safekeeping service uncontrollable. “It may happen that a bank, which keeps 100 taels of gold for customers, would sell 50 taels to get capital to serve its business. After that, it would buy gold in the market later when the prices go down to pay back to customers. No one can know about this,” he said. Dr. Nguyen Van Thuan, the Finance – Banking Dean of the HCM City Open University, also said that since banks buy and sell gold regularly, it will be impossible for the state management agencies to tell the difference between the banks’ gold and the customers’ gold. As such, customers’ gold may turn into banks’ gold which banks would sell on the market when they need money. Immeasurable consequences warned What will happen if banks deliberately sell the gold they keep for customers? Banks would make fat profits if they sell gold for good prices and buy gold back later, when the gold price goes down. However, if the gold prices unexpected increase after the sale, banks would have to hurry to buy gold back at any costs to ensure the liquidity. The actions may make the gold market uncertain, or shake the entire banking system. Doubts have been raised that some commercial banks had sold a part of the gold amount customers left at banks prior to July 11, the time when tens of banks halted the gold safekeeping service, while it was undue for the gold withdrawal. Some analysts think that a big amount of the gold was sold, which then forced banks to buy gold in large quantities from the 55 gold bids invited by the State Bank, where 56.8 tons of gold was sold. Dr. Thuan also believes that a lot of banks have sold the customers’ gold for money and they hurried to buy gold back when customers unexpectedly asked for gold withdrawal. Therefore, the gold market fluctuated heavily several times because of the big demands from banks. Source: NLD