Strict rulebased definition for the tradingbanking book boundary to. Review of the trading book or frtb are designed to address basel 2. Banking book vs trading book the classification of assets between the. What is the difference between a banking book and a. Under frtb so called basel iv frtb, banks risk factors will be assigned five. Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts.
Financial instruments in a trading book are purchased or sold to facilitate trading for the institutions customers, to profit. For example, the definition of banking and trading. The boundary between trading and banking books under frtb. A trading book is the portfolio of financial instruments held by a brokerage or bank. It was generally agreed that permeability across the tradingbanking book boundary created the opportunity for extreme mismatches between risk. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. The revised requirements will lead to increased demands on the availability of. This means revisiting any previous approach to modelling this. Real estate holdings and retail and small business lending must go in the banking book. Frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii. Irr in the trading book is subject to pillar i and hence carries a capital charge, whereas interest rate risk in the banking book irrbb is subject to pillar 2 and does not carry a regulatory charge. Frtb demands a clear segregation of banking book and trading book instruments. Close the loop hole of capital arbitrage between the trading book and the banking book calculate the.
The final notable inclusion in the frtb paper is the way that internal hedging transfers are defined between the banking book assets purchased to be held by the bank and the trading book. Frtb still builds on the intent based criteria for tradingbanking book. The trading book of the banks refers to assets held by a bank that are regularly traded by the bank. However under frtb this principles based approach will go away and will. Frtb prevents capital arbitrage between the trading and banking books. Irr in the trading book is subject to pillar i and hence carries a.
Differential treatment of similar risks held in different books e. Calculate capital using the standardized approach, even though trading desks calculate the capital charge using internal models approach for the trading book what are the issues with the classification. The new market risk paradigm 3 the principal elements of frtb final rule along with the regulatory rationale are described below. Since the credit related products were the main source of losses during the 2009 financial crisis, the bis committee has agreed to bring the trading book requirements closer to the banking book. Revised trading and banking book boundary for market risk 7 frtb still builds on the intent based criteria for trading banking book assignment but supplements it with essential prescriptive rules in order to provide more objectiveness. What is the difference between the trading book and the banking book of a bank. Frtb requires that business be allocated to either the trading or banking book, and not jump the boundary in an arbitrary way. Securities and financial contracts that a bank intends to trade, resell or profit from on.
Revised trading and banking book boundary for market risk 7 frtb still builds on the intent based criteria for tradingbanking book assignment but supplements it with essential prescriptive. Current rules have allowed banks to allocate transactions to trading book largely based on the intent to trade or to hedge. 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. If a bank does an interest rate swap with a customer, thats trading book. Financial instruments in a trading book are purchased or sold for reasons including to. The intention is to improve trading book capital requirements and to promote consistent implementation of the rules so that they produce comparable levels of capital across jurisdictions.
In this video you will learn about what is banking book and what is trading book and what are the differences between them. Banking and trading book in banking risk management youtube. Trading book vs banking book banks are required to divide their balance sheets between banking and trading books both from regulatory and accounting perspective. Capital arbitrage is mitigated by imposing strict limits on the movement of instruments between. However, it clarifies these criteria through more prescriptive rules.
Trading book and banking book treatment in frtb can be summarized in three lines as follows. This chapter sets out the instruments to be included in the trading book which are subject to market risk capital requirements and those to be. Trading book assets are traditionally markedtomarket on timely basis whereas the banking book assets are held until maturity. The standards, approved in january 2016 by the basel committee on banking supervision bcbs and slated for compliance in january 2019. The difference between the trading and banking book blogger.
A trading book is a portfolio of financial instruments held by a brokerage or bank. How assets in the trading book and banking book are. Implications and actions for banks nevertheless, a number of banks have expressed the concern that frtb will lead to a significant increase in capital. Close the loop hole of capital arbitrage between the trading book and the banking book calculate the capital for the trading book and the banking book as if the banks are in stressed market conditions calculate capital using the continue reading trading book and banking book. The center for financial professionals is an international research organization and the focal point for financial risk professionals to advance through renowned thoughtleadership, knowledge sharing. A clear distinction between the trading and banking book assets was proposed by frtb which is very much rule based.
Following the 200708 global financial crisis gfc, bcbs and other regulatory bodies studied the global regulatory framework in an effort to understand what caused or contributed to systemic breakdowns in markets during that period. A fundamental objective of frtb is creating a high, impermeable wall that separates the trading and banking books. Regulators have seen principles based approach to allocate transactions to a trading or a banking book as a source of capital arbitrage for the banks. National supervisors are expected to finalize implementation of the. The final release of frtb introduces various changes to basel 2. Rbc25 boundary between the banking book and the trading book. The reallocation of securities between trading and banking book should be considered a reassignment of securities and is governed by rbc25. Context of the frtb consultation evolution and revolution 1 the origins of a market revolution arbitrage opportunity. Its impact stretches far beyond changes to model methodology. Basel iv revised trading and banking book boundary for. Differences between interest rate risk irr in the banking and. Revised trading and banking book boundary for market risk 5. A financial institutions trading book comprises assets intended for active trading.
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