Issued by the basel committee on banking supervision, the basel iii standards on capital and liquidity, along with measures from july 2009 on trading book and structured finance, are the centrepiece of the regulatory communitys response to the crisis. The difference between the trading and banking book. Whitepaper interest rate risk in the banking book irrbb. Course overview increasing banking regulation is an ongoing challenge for banks. Imf working papers describe research in progress by the authors and are published to elicit comments and to encourage debate. A trading book is the portfolio of financial instruments held by a brokerage or bank. Evolution of the capital accord basel i basel iii basel i minimum risk based capital, definition of capital mra market risk treatment in the trading book. With the interest rate risk of the banking book, the basel committee on. A financial institutions trading book comprises assets intended for active trading. Interest rate risk in the banking book irrbb definition. 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. For example, if rates were to increase and a banks deposits repriced sooner than its loans, it could result in the bank paying out more interest on deposits than the interest it is receiving from loans. The standardised drc as a whole is calibrated to the credit risk treatment in the banking book to reduce the potential discrepancy in capital requirements for similar risk exposures across the banking book and trading book. The basel committee on banking supervision has today issued standards for interest rate risk in the banking book irrbb.
The trading book is an accounting term that refers to assets held by a bank that are regularly traded. 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. With the interest rate risk of the banking book, the basel committee on banking supervision bcbs 1 aims primarily to address the potential loss of economic value of institutions from a change in the interest rates called irr and credit spread risk csr in the banking book 2. The interest rate risk in banking book refers to the risk to a banks capital and earnings arising from adverse movements in interest rates that affect banking book positions. These securities are accounted for in a different way than those in the trading book, which are traded on the market and valued by the performance of the market. The precise answer is both complex and involves considerable latitude for opinion. Its internal ratingsbased approaches to capital regulation will allow large banks to use their own credit risk models to set minimum capital requirements.
Accounting does not affect risk, you analyze risk the same for trading and banking book. In april 2016, the basel committee on banking supervision bcbs issued final standards on irrbb that replace the 2004 principles for the management and supervision of interest rate risk. Capital definitions, capital buffers and liquidity. In 2016, the basel committee on banking supervision bcbs issued new standards on interest rate risk in the banking book commonly referred to as irrbb.
The basel ii agreements bcbs, 2004 define regulatory capital through the. Revised trading and banking book boundary for market risk 19 fig. The interest rate risk in banking book refers to the risk to a bank s capital and earnings arising from adverse movements in interest rates that affect banking book positions. Circular 20192 interest rate risk banks amended 20. Key decision maker can find it difficult to keep up with the volume of regulatory change. For internal deals between the banking book and the trading book, the banking book leg of the internal deal should be reported if and only if the trading book leg of the deal is recognised under the market risk capital framework in the banking capital rules. The standards revise the committees 2004 principles for the management and supervision of interest rate risk, which set out supervisory expectations for banks identification, measurement, monitoring and control of irrbb as well as its supervision. The passages of the basel text to which this circular refers to shall always be indicated in square brackets. Interest rate risk in the banking book is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. This course is designed as an intermediate level in depth look at the key provisions of the basel iii regulatory framework, the ongoing risk assessment practice within banks, and the vital role of stress testing. Sec1 securitization exposures in the banking book b. Cfp is driven by and dedicated to high quality and reliable primary market research. What is the difference between a banking book and a. The basel committee on banking supervision bcbs is a committee of banking supervisory authorities that was established by the central bank governors of the group of ten countries in 1974.
Its implementation is set as 1 january 2016, however, in june the basel committee for banking supervision bcbs published a consultative document cd on the interest rate risk in the banking book irrbb. Basel i is a set of international banking regulations put forth by the basel committee on bank supervision bcbs that sets out the minimum capital. Basel iii rwa optimization can be seen as an extension of the basel ii rwa optimization. This paper looks at the standards from a practical implementation point of view and raises some of the main challenges. Basel committee on banking supervision consultative. All other instruments must be included in the banking book. These securities are accounted for in a different way than those in the trading book, which are traded on. Differences between interest rate risk irr in the banking and. How will credit spread risk in the banking book be put. However, the definition of the limits of the banking book is extremely.
Market risk can be defined as the risk of losses in on and offbalance sheet positions arising from adverse movements in market prices. It is like shifting the banking book loan to trading book bond and reducing capital. The banking book can also include those derivatives that are used to hedge exposures arising from the banking book activity, including interest rate risk. The trading book is required under basel ii and iii to be marked to market daily.
In this regard the authors point out that it is the probability of default pd that is the parameter of interest for stress testing, since the ead and the lgd are relatively insensitive to radical events by their very definition. The committee expanded its membership in 2009 and then again in 2014. If a bank does an interest rate swap with a customer, thats trading book. The basel committee on banking supervision defines credit spread risk in the banking book csrbb as any kind of assetliability spread risk of creditrisky instruments that is not explained by irrbb and by the expected creditjump to default risk, stating that csrbb is a related risk that banks need to monitor and assess in their interest rate risk management framework. What is interest rate risk in the banking book irrbb. But for regulatory and accounting purposes, the banking book has minimal. In april 2016, the basel committee on banking supervision bcbs published the standards on interest rate risk in the banking book irrbb. After the overwhelming global success of the first edition of our basel iv book we are proud to announce that the extensively enhanced second edition with additional details, examples and case studies was published on the 8th of august.
The new standards set out the committees expectations on the management of irrbb in terms of identification, measurement, monitoring, control and supervision. In 2019, the bcbs has 45 members from 28 jurisdictions, consisting of central banks and authorities with responsibility of banking. 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. According to the basel committee, these latest changes to the frtb rules will result in an estimated 40% weighted average increase in total market risk capital requirements1. Another key aspect of basel iv is the revised framework for credit risk in the banking book2 which aims to deliver consistency of capital requirements across banks. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts. 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. A detailed comparison of baking book and trading book capital. In face of the approaching deadline, interested and impacted parties have shared their comments on irrbb among which febelfin. Under this approach, irrbb is measured by means of the following. Upon completion, participants will have a comprehensive understanding of internal risk assessment as required under basel iii and especially with reference to the icaap process. Whitepaper a summary of bcbs interest rate risk in the. Financial instruments in a trading book are purchased or sold for reasons including to. Basel iii, risk assessment and stress testing training.
Rbc25 boundary between the banking book and the trading book. The difference between the trading and banking book blogger. Until basel 2 guidelines there was a huge capital advantage in keeping trade in trading book instead of banking book. For fx and commodity positions in the banking book, the actual. Basel ii represents a dramatic change in capital regulation of large banks in the countries represented on the basel committee on banking supervision.
On june 8, 2015 the basel committee for banking supervision bcbs published the consultative paper 319 on interest rate risks in the banking book, which has been developed by the task force on interest rate risk in the banking book tfir over the last years. In contrast with the credit risk treatment in the banking book, the trading book. The final standard updated a set of principles laid out in 2004, to reflect changes in the market and supervisory practices. The new basel committee on banking supervision bcbs standards for irrbb come into force january 1, 2018. 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, unparalleled networking, industry solutions and lead generation. Basel iv revised trading and banking book boundary for. The new capital rule, which takes effect for community banks in january 2015, is intended to strengthen the quality and increase the required level of regulatory capital in order to promote a more stable and resilient banking system. Moreover, a quantitative impact study qis was published within the basel iii monitoring environment on july 31, 2015 in order. Any changes in interest rates have an impact on the present value of future cash flows on the bank. The forthcoming capital requirements directive crd 5 and capital requirements regulation crr 2 implement the bcbs standards in the regulatory framework of the european union. This course provides an overview of recent and upcoming basel. Its aim is to identify earnings volatility over a 12monthhorizon against the two instantaneous. An accounting book that includes all securities that are not actively traded by the institution, that are meant to be held until they mature.
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. Trading book and banking book treatment in frtb can be summarized in three lines as follows. What is the difference between a banking book and a trading book. In contrast the banking book is an accounting tool for banks to incorporate. A bank must have clearly defined policies, procedures and documented practices in order to determine the correct allocation of instruments to the trading book and. Capital arbitrage is mitigated by imposing strict limits on the movement of instruments between books, and, if the capital charge on an instrument or portfolio is reduced as a result of. Interest rate risk in the banking book of april 2016 irrbb1. The banking book is a term for assets on a bank s balance sheet that are expected to be held to maturity, usually consisting of customer loans to and deposits from retail and corporate customers. What is the difference between the trading book and the banking book of a bank. Banking book directive summary in april 2016, the basel committee on banking supervision bcbs published the final standard on capital framework for interest rate risk in the banking book irrbb. In 1988, bcbs published a set of standards, known as basel i, which became banking regulations focusing mainly on credit risk. Nii, on the other hand, is always based on cash flows at client rates and thus represents total nii. The interest rate risk in banking book refers to the risk to a.
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