Trading book vs banking book frtb

What is the difference between the trading book and the banking book of a bank. Banking book vs trading book the classification of assets between the banking book and trading book was unclear allowing arbitrage opportunity for rwa optimization for instance, the credit risk component in the banking book is more. On 14 january 2016 the bcbs published the frtb rules which aim to standardise the treatment of market risk internationally and impose stricter global capital requirements. Close the loop hole of capital arbitrage between the trading book and the banking book. Post the 2008 financial crisis, there were multiple regulations issued by the regulatory bodies t. Differences between interest rate risk irr in the banking and. Current rules have allowed banks to allocate transactions to trading book largely based on the intent to trade or to hedge. 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. Banking and trading book in banking risk management youtube. A financial institutions trading book comprises assets intended for active trading. Basel iv revised trading and banking book boundary for. There is a clear criterion for assigning instruments to the. They can request a shift from the trading book to the banking book or vice versa if an instrument is deemed to be improperly designated or if the evidence provided is deemed incomplete art 18 and 19.

National supervisors are expected to finalize implementation of the revised market risk standard by january 2019 and to require their banks to report under the new standards by 2020. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. National supervisors are expected to finalise implementation of the revised market risk standard by january 2019 and to require their banks to report under the new standards by 2020. 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. Trading book vs banking book banks are required to divide their balance sheets between banking and trading books both from regulatory and accounting perspective. 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.

Please contact the center for financial professionals today to discuss how we can deliver your thoughtleadership at the event, help you generate leads, and provide you with unique networking and branding opportunities. Trading book and banking book treatment in frtb can be summarized in three lines as follows. Supervisory oversight is provided for any deviations from this guidance and supervisors may initiate change from the trading book to the banking book or vice versa if an instrument is deemed to be improperly designated. Frtb builds on the intent based criteria for trading banking book assignment as set out in basel ii. The new boundary between the trading book and banking book which will limit the potential for regulatory arbitrage.

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. A trading book is the portfolio of financial instruments held by a brokerage or bank. What is the difference between a banking book and a. The primary issue with the above framework has been a lack of clear demarcation of boundary between the two books, which in the past enabled banks to shift assets to the trading book from the banking book prior to the financial crisis due to lower capital requirements and then do the reverse post financial crisis due to massive loss in. Frtb demands a clear segregation of banking book and trading book instruments. 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 rules in order to provide more objectiveness.

Financial instruments in a trading book are purchased or sold for reasons including to. A trading book consists of all instruments that meet the specifications for trading book instruments set out in rbc25. The reallocation of securities between trading and banking book should be considered a reassignment of securities and is governed by rbc25. The standards, approved in january 2016 by the basel committee on banking supervision bcbs and slated for compliance in january 2019, will fundamentally change the way firms calculate, plan for, and manage risk on the trading book. Your existing infrastructure will need updating or augmenting to deliver an effective and efficient solution, particularly in the following areas. Unsubscribe from foreign exchange maverick thinkers. Through the frtb rules, bcbs is seeking, for example, to establish a more objective boundary between the trading book and the banking book, and to eliminate capital arbitrage. A fundamental objective of frtb is creating a high, impermeable wall that separates the trading and banking books. Supervisors powers finally, supervisors powers over the booking control are extended. A costeffective solution to new frtb computing requirements.

Its impact stretches far beyond changes to model methodology. Revised trading and banking book boundary for market risk 5. Rbc25 boundary between the banking book and the trading book. The boundary between trading and banking books under frtb. The revised requirements will lead to increased demands on the availability of. This is the revised boundary, where frtb guidelines will focus on reducing arbitrage rather than. Video would be covering detailed aspects of frtb like internal models and.

How assets in the trading book and banking book are. The trading book is required under basel ii and iii to be marked to market daily. If a bank does an interest rate swap with a customer, thats trading book. Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. However, it clarifies these criteria through more prescriptive rules. The difference between the trading and banking book blogger. For example, the definition of banking and trading books are more prescriptive, with tighter restrictions on tradingbanking book reclassifications designed to reduce regulatory arbitrage. The requirements of frtb mean that existing basel market risk rules will be substantially altered. Frtb is a regulation issued by the basel committee on banking supervision bcbs, a committee of banking supervisory authorities established in 1974. Managing capital and stress testing for traded book assets. Calculate the capital for the trading book and the banking book as if the banks are in stressed market conditions. In this video you will learn about what is banking book and what is trading book and what are the differences between them. Banks must use sa, unless they meet ima requirements on an ongoing basis, in which case. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts.

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 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. 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. Frtb still builds on the intent based criteria for tradingbanking book. Requirements of the banking book trading book boundary. The final release of frtb introduces various changes to basel 2. A trading book is defined as positions which the bank holds for the purpose of short term gain and which it. Under volcker, therefore, trading accounts are not identified as such if the account aligns with the trading book or banking book within the bank. However, some joint dynamics are required to capture the emergence of collateral risk exploring both regulatory and internal risk capital. Banking book frtb mandates new rules to determine the scope of instruments eligible for inclusion in the trading book as well as more stringent requirements to govern internal risk transfers between banking and trading books. The finalisation of the frtb at basel level and an outlook on eussm implementation.