Basel iii rwa optimization can be seen as an extension of the basel ii rwa optimization. The trading book should be used by banks ideally only to incorporate assets which are held for trading as opposed to being held till maturity for example, any derivative instrument used as a speculative or. All other instruments must be included in the banking book. Financial instruments in a trading book are purchased or sold for reasons including to. Basel iv revised trading and banking book boundary for market.
A major gap thus revealed by the 2008 nancial crisis was the inability to adequately identify the credit risk of the trading book positions any component of. Frtb removes nearly all of a firms ability to move assets between the banking book and trading book. Jun, 2016 in january 2016, the basel committee on banking supervision published its standards for minimum capital requirements for market risk. The standardised drc as a whole is calibrated to the credit risk treatment in the banking book to reduce the potential discrepancy in capital requirements for similar risk exposures across the banking book and trading book. The trading book refers to assets held by a bank that are available for. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. What is interest rate risk in the banking book irrbb. This differs from a banking book as securities in a trading book are not. What is the difference between trading and banking. Any changes in interest rates have an impact on the present value of future cash flows on the bank.
Capital definitions, capital buffers and liquidity. Revised trading and banking book boundary for market risk 5. The banking book refers to assets on a banks balance sheet that are expected to be held to maturity. Commentators in the financial services media have been quick to latch on to basel iv as the latest regulatory impediment.
Calculate the capital for the trading book and the banking book as if the banks are in stressed market conditions. Frtb has recommended stricter guidelines for banks to switch from a banking book to a trading book and vice versa. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. This can be defined as risk of movement of the underlying value as perceived by the lender vs market value of the underlying. What is the difference between a banking book and a trading book. The books held by the banks may be identified as banking book and trading book. The trading book is required under basel ii and iii to be marked to market daily. What is the difference between the trading book and the banking book of a bank. This disclosure separates the trading and banking book holdings, and reports both gross and net positions, taking account of hedging contracts. May 16, 2014 it has been left to banks to decide the intent of trading and classify the trade accordingly. Jun 07, 2017 the precise answer is both complex and involves considerable latitude for opinion. Differences between interest rate risk irr in the banking.
The banking book is a term for assets on a banks balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. The trading book should be used by banks ideally only to incorporate assets which are held. Until basel 2 guidelines there was a huge capital advantage in keeping trade in trading book instead of banking book. Basel committee on banking supervision consultative. The final release of frtb introduces various changes to basel 2. Banking book held by the bank is important for the risk management practice. A financial institutions trading book comprises assets intended for active trading. So far, the banks have been deciding if a book was a trading book or a banking book, and there was an incentive to arbitrage from this determination, as there was a difference in the capital.
Nov 28, 2016 the trading book is required under basel ii and iii to be markedtomarket on a daily basis. Banks must fair value daily any trading book instrument and recognise any. So here are the definitions on how to treat a position either as a banking book or as a trading book. The rules are due to come into effect at the end of 2019 and are encapsulated in bcbs 352, minimum capital requirements for market risk. The original proposals were watered down, but we think the final revised minimum capital standards for modeldriven market risk are positive for creditors because improved model standards and more prudent methods employed to capture risk should mean trading risks are more accurately capitalised. These securities are accounted for in a different way than those in the trading book, which are traded on. Differences between interest rate risk irr in the banking and. For example, the definition of banking and trading books are more prescriptive, with tighter restrictions on tradingbanking book reclassifications designed to reduce regulatory arbitrage. The major overhaul of market risk capital regime is.
From a regulatory perspective, market risk stems from all the positions included in banks trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet. The really brief version imo is that, basically, banks could regulatory arbitrage by shifting from the banking book to the trading book. If a bank does an interest rate swap with a customer, thats trading book. Issuu is a digital publishing platform that makes it simple to publish magazines, catalogs, newspapers, books, and more online. The difference between the trading and banking book blogger.
The distinction parallels the one between the banking book, containing notably longcredit loans, and the trading book, usually including long and short positions e. This video explains basel iii capital requirement vs basel ii for more information about basel iii please visit our full course. There has been a lot of discussion on how frtb will define whether a book is a banking book or a trading book. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts. Under the volcker rule, the trading account definition is a statutory concept to identify transactions that are subject to the final rules restrictions on proprietary trading.
With the interest rate risk of the banking book, the basel committee on banking supervision bcbs 1 aims primarily to address the potential loss of economic value of institutions from a change in the interest rates called irr and credit spread risk csr in the banking book 2. Basel iii minimum capital requirements for market risk frtb. Securities and financial contracts that a bank intends to trade, resell or profit from on. All the books held in capital markets or investment banking division of a bank. Definition of banking books in the financial dictionary by free online english dictionary and encyclopedia.
The banking book is a term for assets on a banks balance sheet that are expected to be held to. We are looking forward to you presenting at the risk emea summit where you will be focusing on the trading book and banking book. Basel committee on banking supervision consultative document. A trading book is defined as positions which the bank holds for the purpose of short term gain and which it can close when markets conditions are favourable. What is the difference between a banking book and a. Market risk trading and banking book in light of basel iii. However, it clarifies these criteria through more prescriptive rules. Can you give us a very brief overview of the trading book and banking book revisions within the. We can expect to see a lot of models changes and technology data and support services changes at all the trading desks. May 26, 2014 this video explains basel iii capital requirement vs basel ii for more information about basel iii please visit our full course. A trading book is the portfolio of financial instruments held by a brokerage or bank. Basel i minimum risk based capital, definition of capital mra market risk treatment in the trading book. It has been left to banks to decide the intent of trading and classify the trade accordingly. Frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii.
Trading book vs banking book banks are required to divide their balance sheets between banking and trading books both from regulatory and accounting perspective. Evolution of the capital accord basel i basel iii basel i minimum risk based capital, definition of capital mra market risk treatment in the trading book. Trading could be construed as a subset of investment banking. As a global professional services company, we offer financial. It is like shifting the banking book loan to trading book bond and reducing capital. Trading book and banking book treatment in frtb can be summarized in three lines as follows. The precise answer is both complex and involves considerable latitude for opinion. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices.
Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. Crr iicrd v is expected to come into force in 2020. The basel committee on banking supervision bcbs wants to make banks treat the assets in their trading books more like those in their banking books by forcing them to hold increased capital against assets designated for trading historically, lower capital requirements for trading book assets had encouraged banks to shift assets from the more expensive banking book into the trading. The basel committee on banking supervision bcbs is a committee of banking supervisory authorities that was established by the central bank governors of the group of ten countries in 1974. Drc is computed for nonsecuritisations, securitisations noncorrelation trading. As opposed to the banking book, the trading book includes all the trading. A bank must have clearly defined policies, procedures and documented practices in order to.
Meirc offers basel iii, risk assessment and stress testing and other banking, insurance and financial services related training courses in abu dhabi, dubai, jeddah, riyadh, across the gcc. A trading book consists of all instruments that meet the specifications for trading book instruments set out in rbc25. The valueatrisk var for assets in the trading book is measured on a 10day time horizon under basel ii. Revised trading and banking book boundary for market risk presumed assignment to the trading book alternative allocation possible through explicit supervisory approval there is a general presumption that any of the following instruments are being held for at least one of the above. Trading desk definitions under frtb and volcker accenture. Banks could decide which was the trading book and which was the banking book and this created incentives to profit from the arbitrage from this determination. Basel capital rules for banks trading books will shift. Basel iii, risk assessment and stress testing training. An introduction to expected shortfall frtb, using components of the corresponding module found under optimal mrms elearning service. A financial instrument is any contract that gives rise to both a. An accounting book that includes all securities that are not actively traded by the institution, that are meant to be held until they mature. Basel committee on banking supervision, october 20 trading book banking book boundary treatment of credit risk in the trading book banking booktrading book boundary to be more objective additional tools for supervision 1. The portfolio of financial instruments in the trading book may be resold to benefit from shortterm price fluctuations, used for hedging or traded to fulfil the firms or clients needs.
The difference between the trading and banking book. A trading book is defined as positions which the bank holds for the purpose of short term gain and which it. In particular, loans that would have been charged for credit risk, at oneyear 99. Instruments comprise financial instruments, foreign exchange fx, and commodities. The trading book is an accounting term that refers to assets held by a bank that are regularly traded.
The committee expanded its membership in 2009 and then again in 2014. The valueatrisk for assets in the trading book is measured on a tenday time horizont under basel ii. What is the difference between a banking book and a trading. For example, the definition of banking and trading books are more prescriptive, with tighter restrictions on trading banking book reclassifications designed to reduce regulatory arbitrage. The loose definition of the regulatory boundary has been a source of weakness, and banks have been defining the status of a book. A firm must establish and maintain systems and controls to manage its trading book, in accordance with the trading book systems and controls rules, bipru 1. Basel committee on banking supervision, october 20 trading book banking book boundary treatment of credit risk in the trading book banking booktrading book boundary to be more objective additional tools for supervision 1 weaknesses of var approach hedging and diversification. The economic impact on all impacted banks is large. Close the loop hole of capital arbitrage between the trading book and the banking book. Trading book banking book stringent approach for the movement of instruments between books a instrument have to be included in the trading book if it.
Repos and the overall financial adequacy rule to bipru 1. Can you give us a very brief overview of the trading book and banking book revisions within the revised basel market risk framework. Banking books financial definition of banking books. Easily share your publications and get them in front of issuus. With the interest rate risk of the banking book, the basel committee. An accounting book that includes all securities that the institution regularly buys and sells on the stock market. For conciseness, we set the lgd rate to 100% for each position of the two portfolio types. These securities are accounted for in a different way than those in the banking book, which are meant to be held by the institution until they mature and are not usually affected by. Hence, it is analysed if the market risk charge mrc of the trading book increases under the requirements of basel iii, relative to basel ii. How assets in the trading book and banking book are. Typically, a large investment banking firm would have the following divisions. Rbc25 boundary between the banking book and the trading book.