Banking book and trading book basel
Differences Between Interest Rate Risk (IRR) in the Banking and Trading Book | FinastraThere is often confusion about the different nature of the Interest Rate Risk IRR in the banking book versus the trading book and what needs to be measured. The trading book refers to assets held by a bank that are available for sale and hence regularly traded. Banks are not required to mark these to market. They are usually held at historical cost. As such, this provides an opportunity for regulatory arbitrage.
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Trading book & banking book: Key modelling challenges
The BIS hosts nine international organisations engaged in standard setting and the pursuit of financial stability through the Basel Process. 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 trading book is the portfolio of financial instruments held by a brokerage or bank. Financial instruments in a trading book are purchased or sold for several reasons. For example, they might be bought or sold to facilitate trading actions for customers or to profit from trading spreads between the bid and ask prices, or to hedge against different forms of risk. Trading books can range in size from hundreds of thousands of dollars to tens of billions depending on the size of the institution. Most institutions employ sophisticated risk metrics to manage and mitigate risk in their trading books. Trading books function as a form of accounting ledger by tracking the securities held by the institution that are regularly bought and sold.