Basel iv revised trading and banking book boundary for. Nov 28, 2016 the trading book is required under basel ii and iii to be markedtomarket on a daily basis. Frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii. Models vs standard var and credit risk in the trading book low sensitivity to extreme events banking book vs trading book arbitrage basel 2. Through the frtb rules, bcbs is seeking, for example, to establish a more objective boundary between the. The amendment to the basel capital accord included a standardised approach and an internal models approach. A trading book is defined as positions which the bank holds for the purpose of short term gain and which it. Insight and strategies for entering the frtb era disclaimer. International standards, bcbs basel committee on banking supervision, standards, 2016 standards basel, capital requirements. Objectives of the revised trading banking book boundary. However, it clarifies these criteria through more prescriptive rules. This chapter sets out the instruments to be included in the trading book which are subject to market risk capital.
Jun, 2016 in january 2016, the basel committee on banking supervision published its standards for minimum capital requirements for market risk. Issuu is a digital publishing platform that makes it simple to publish magazines, catalogs, newspapers, books, and more online. Minimum capital requirements for market risk capital. Given the many infrastructure and workflow changes needed to implement frtb, banks need to move quickly in order to meet these. A trading book is the portfolio of financial instruments held by a brokerage or bank.
Trading book and banking book treatment in frtb can be summarized in three lines as follows. If a bank does an interest rate swap with a customer, thats trading book. However, this left many banks with insufficient capital to cover losses when credit markets collapsed during the crisis. The way ahead executive summary interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest. Basel iv revised trading and banking book boundary for market. 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. How assets in the trading book and banking book are distinguished.
Differences between interest rate risk irr in the banking. The distinction parallels the one between the banking book, containing notably longcredit loans, and the trading book, usually including long and short positions e. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. Financial instruments in a trading book are purchased or sold for reasons including to. I can not understand whether basel iii in the part of market risk applies both to trading book and banking book or just to the first one. The valueatrisk var for assets in the trading book. Historically, lower capital requirements for trading book assets had encouraged banks to shift assets from the more expensive banking book into the trading book. This reform, often referred to as basel iv, is one of the initiatives taken to strengthen the financial system, noting that the previous proposals did not prevent the. Revised standardised approach for market risk 11 the history of the trading book regime 1996 basel i first methodology laid out by the bcbs to set out capital requirements for market risks. 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. Over a decade in the making, frtb will profoundly impact business lines, trading volumes, and the use of technology platforms.
Basel committee on banking supervision consultative document. An accounting book that includes all securities that are not actively traded by the institution, that are meant to be held until they mature. The books held by the banks may be identified as banking book and trading book. Banks are strictly prohibited from reallocating an instrument in the trading book into the banking book for regulatory arbitrage benefits. As a global professional services company, we offer financial. Basel committee on banking supervision consultative. The really brief version imo is that, basically, banks could regulatory arbitrage by shifting from the banking book to the trading book. How assets in the trading book and banking book are.
For conciseness, we set the lgd rate to 100% for each position of the two portfolio types. 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 tradingbanking book reclassifications designed to reduce regulatory arbitrage. Interest rate risk in banking book irrbb refers to the current or prospective risk to a banks capital and earnings arising from adverse movements in interest. It is like shifting the banking book loan to trading book bond and reducing capital. We can expect to see a lot of models changes and technology data and support services changes at all the trading desks. A financial instrument is any contract that gives rise to both a. These securities are accounted for in a different way than those in the trading book, which are traded on. If a bank makes a fiveyear corporate loan it intends to keep on its books, thats banking book.
The boundary between the trading book and banking book and the scope of application of the minimum capital requirements for market risk. A financial institutions trading book comprises assets intended for active trading. Current rules have allowed banks to allocate transactions to trading book largely based on the intent to trade or to hedge. The difference between the trading and banking book. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. Scope of application and methods of measuring market risk. It revises the internal models approach and standardized approach for market risk capital management and introduces expected shortfall, which is a measure of risk under stress and incorporates. The valueatrisk var for assets in the trading book is measured on a 10day time horizon under basel ii. Through the frtb rules, bcbs is seeking, for example, to establish a more objective boundary between the trading book and the banking book, and.
So here are the definitions on how to treat a position either as a banking book or as a trading book. Display event market risk management under basel iii. The difference between the trading and banking book blogger. 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. Trading book vs banking book banks are required to divide their balance sheets between banking and trading books both from regulatory and accounting perspective. The precise answer is both complex and involves considerable latitude for opinion. Until basel 2 guidelines there was a huge capital advantage in keeping trade in trading book instead of banking book.
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. Close the loop hole of capital arbitrage between the trading book and the banking book. Real estate holdings and retail and small business lending must go in. Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. Interest rate risk in banking books irrbb duration. Rbc25 boundary between the banking book and the trading book.
I have read that for what concerns banking book you only compute credit, change in commodity price and exchange rate. The final release of frtb introduces various changes to basel 2. What is the difference between a banking book and a. In its october 20s consultative paper for a revised market risk framework frtb, and subsequent versions published thereafter, the basel committee suggests that nonsecuritization credit positions in the trading book be subject to a separate default risk charge drc, formally incremental default risk charge or idr. The trading book is required under basel ii and iii to be markedtomarket on a daily basis. Differences between interest rate risk irr in the banking and. Revised trading and banking book boundary for market risk 5. What the basel proposals on bank tradingbook rules mean. It has been left to banks to decide the intent of trading and classify the trade accordingly.
The difference between the trading and banking book what is the difference between the trading book and the banking book of a bank. Implications and actions for banks nevertheless, a number of banks have expressed the concern that frtb will lead to a significant increase in capital requirements which, combined with higher compliance costs, could decrease banking profitability. May 16, 2014 it has been left to banks to decide the intent of trading and classify the trade accordingly. 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. There has been a lot of discussion on how frtb will define whether a book is a banking book or a trading book. Trading book and credit risk twofactor model for incremental default risk charge impact on the risk. What is the difference between a banking book and a trading book. The allocation of assets into the trading book has a significant impact on a firms regulatory risk capital requirements. What is the difference between the trading book and the banking book of a bank. Easily share your publications and get them in front of issuus. In accounting jargon banking book is referred to registers of accounts. Instruments comprise financial instruments, foreign exchange fx, and commodities.
Basel iii minimum capital requirements for market risk frtb. However under frtb this principles based approach will go away and will. The trading book is required under basel ii and iii to be marked to market daily. Sep 26, 2017 why banks trading books are new target of rules. Basel capital rules for banks trading books will shift. Market risk trading and banking book in light of basel. The basel committee on banking supervision has proposed a fundamental overhaul of its bank tradingbook rules after finding discrepancies among banks, in. 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.
Market risk trading and banking book in light of basel iii. 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. We are looking forward to you presenting at the risk emea summit where you will be focusing on the trading book and banking book. Jun 07, 2017 the precise answer is both complex and involves considerable latitude for opinion. Real estate holdings and retail and small business lending must go in the banking book. Calculate the capital for the trading book and the banking book as if the banks are in stressed market conditions. Can you give us a very brief overview of the trading book and banking book revisions within the revised basel market risk framework. A trading book consists of all instruments that meet the specifications for trading book instruments set out in rbc25. 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. 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 valueatrisk for assets in the trading book is measured on a tenday time horizont under basel ii. All other instruments must be included in the banking book. What are the issues with the classification of the trading book and banking book boundary.