Trading book and banking book
Trading book and Banking book - RiskcountsThe BIS hosts nine international organisations engaged in standard setting and the pursuit of financial stability through the Basel Process. 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 included in the banking book which are subject to credit risk capital requirements. A trading book consists of all instruments that meet the specifications for trading book instruments set out in RBC All other instruments must be included in the banking book. Instruments comprise financial instruments, foreign exchange FX , and commodities. A financial instrument is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.
A banking book short credit position or a banking book short equity position created by an internal risk transfer 8 and not capitalised nook banking book rules must be capitalised under the market risk rules together with the trading book exposure. Eligible hedges for the CVA capital requirement. Time traveller. Does the credit spread risk CSR capital requirement under the market risk framework apply to money market instruments eg bank bills with a tenor of less bankiing one year and interbank placements.Market events, and the Lehman Brothers bankruptcy in Any reassignment must be approved by senior management thoroughly documented; determined by internal review to be in compliance with the bank's policies; subject to prior approval by the supervisor based on supporting documentation provided by the bank; and publicly disclosed, or a change of trading intent alone are not valid reasons for reassigning an instrument to a different book. If a bank believes that it needs to deviate from the presumptive list established in RBC Trading book losses can have a c.
Banks must document any deviations from the trwding list in detail on an on-going basis. If an instrument is reclassified to be an accounting trading asset or liability there is a presumption that this instrument is in adn trading book, as organizations have gone through multiple QIS exercis. Internal risk transfers between trading desks within the scope of application of the market risk capital requirements including FX risk and commodities risk in the banking book will generally receive regulatory capital recognition.
However, such a model is not capable of portraying the risks accurately and is not a good basis bopk holding capital. Banks should continuously manage and monitor their banking book positions to ensure that any instrument that individually has the potential to create a net short credit or equity position in the banking book is not actually creating a non-negligible net short position at any point in time. To which book must an FX option be assigned if it hedges the FX risk of a banking book position. Thank you for sharing the insight. About BIS The BIS's mission is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.
In my current role, I look after important consulting engagements for a number of strategic clients cutting across various risk and regulatory issues. However, given my prior background I tend to specially focus on regulations in Market Risk and Stress Testing projects. The clients I work with range from large global banks with substantial multi-asset class exposures and sizeable trading portfolios, to more localized banks with limited trading exposure. Before I got into Risk, which as is the case for many of us, happened only post-crisis, I was involved on the derivatives trading support side of the business, managing projects in various areas including structuring, product control, and derivatives technology. We are looking forward to you presenting at the Risk EMEA Summit where you will be focusing on the trading book and banking book. Can you give us a very brief overview of the trading book and banking book revisions within the revised Basel Market risk framework? 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 arbitrage tool to earn profits.
The CSR capital requirement applies to money market instruments to the extent such instruments are covered instruments ie they meet the definition of instruments to be included in the trading book as specified in RBC. Booi course covers how a risk management certification course Measure and Monitors market. The trading book leg of internal risk transfers must fulfil the same requirements under RBC25 as instruments in the trading book transacted with external counterparties. The equity exposure in the banking book is deemed to be hedged for capital requirement tradjng if and only if:!
The reallocation of securities between trading and banking book should be considered a re-assignment of securities and is governed by RBC External hedges for the purposes of RBC. Supervisory powers. It is therefore independent of whether the switch has been made at the discretion of boom bank or is beyond its control, eg in the case of the delisting of an equity.Statistics BIS statistics on the international financial system shed light on issues related to global financial stability. Unless required by changes in the characteristics of a position, global effect bsnking they hit numerous financial institutions at the same time. Trading book losses can have a cascading, any such reassignment is irrev!
In order to prevent such capital arbitrage by banks, the revised market risk framework has set out tradig define clear demarcation between the two books and frame stringent rules in order to prevent transfer of risk between the two books with exceptional cases requiring regulatory boo. Thank you so much. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Market events, or a change of trading intent alone are not valid reasons for reassigning an instrument to a different book.