Basel iv revised trading and banking book boundary for. Implications and actions for banks nevertheless, a number of banks have expressed the concern that frtb will lead to a significant increase in capital. What is the difference between a banking book and a. It was generally agreed that permeability across the tradingbanking book boundary created the opportunity for extreme mismatches between risk. Frtb prevents capital arbitrage between the trading and banking books. Review of the trading book or frtb are designed to address basel 2. A financial institutions trading book comprises assets intended for active trading. Frtb demands a clear segregation of banking book and trading book instruments. 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.
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. 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. A trading book is the portfolio of financial instruments held by a brokerage or bank. 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. However, it clarifies these criteria through more prescriptive rules. For example, the definition of banking and trading. Differences between interest rate risk irr in the banking and. 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. A fundamental objective of frtb is creating a high, impermeable wall that separates the trading and banking books. National supervisors are expected to finalize implementation of the. 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. Strict rulebased definition for the tradingbanking book boundary to. 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. 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.
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. Banking book vs trading book the classification of assets between the. 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. Financial instruments in a trading book are purchased or sold for reasons including to. The boundary between trading and banking books under frtb.
A clear distinction between the trading and banking book assets was proposed by frtb which is very much rule based. The trading book of the banks refers to assets held by a bank that are regularly traded by the bank. If a bank does an interest rate swap with a customer, thats trading book. The final release of frtb introduces various changes to basel 2. Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. Frtb still builds on the intent based criteria for tradingbanking book. Frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii.
The precise answer is both complex and involves considerable latitude for opinion. Under frtb so called basel iv frtb, banks risk factors will be assigned five. Its impact stretches far beyond changes to model methodology. Financial instruments in a trading book are purchased or sold to facilitate trading for the institutions customers, to profit.
Rbc25 boundary between the banking book and the trading book. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. Real estate holdings and retail and small business lending must go in the banking book. 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. The new market risk paradigm 3 the principal elements of frtb final rule along with the regulatory rationale are described below. The standards, approved in january 2016 by the basel committee on banking supervision bcbs and slated for compliance in january 2019. Close the loop hole of capital arbitrage between the trading book and the banking book calculate the. 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. The difference between the trading and banking book blogger. Banking and trading book in banking risk management youtube.
There is a clear criterion for assigning instruments to the. Trading book assets are traditionally markedtomarket on timely basis whereas the banking book assets are held until maturity. Context of the frtb consultation evolution and revolution 1 the origins of a market revolution arbitrage opportunity. Differential treatment of similar risks held in different books e. Irr in the trading book is subject to pillar i and hence carries a. Revised trading and banking book boundary for market risk 5.
The reallocation of securities between trading and banking book should be considered a reassignment of securities and is governed by rbc25. In this video you will learn about what is banking book and what is trading book and what are the differences between them. This means revisiting any previous approach to modelling this. How assets in the trading book and banking book are. What is the difference between the trading book and the banking book of a bank. 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. Current rules have allowed banks to allocate transactions to trading book largely based on the intent to trade or to hedge.
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