Basel ii trading book banking book

The basel accords have continued to evolve since the original 1988 accord, to capture a greater range of risks. As mentioned above, the first level of trading book criteria are a summary of the basel ii criteria. Capital requirements for market risk protiviti united. I can not understand whether basel iii in the part of market risk applies both to trading book and banking book or just to the first one. Basel ii represents a dramatic change in capital regulation of large banks in the countries represented on the basel committee on banking supervision. The boundary between trading and banking books under frtb. Basel committee trading book requirements revision. Mohan bhatia is a senior principal consultant for basel ii practice at iflex where he is currently spearheading reveleus basel ii implementation. Banking book positions, which may be accounted for at amortized cost, lower of cost or market, fair value or under the equity method, are subject to credit risk capital requirements which are discussed in section 5 and section 6 included herein. Financial instruments in a trading book are purchased or sold for reasons including to.

Revised trading and banking book boundary for market risk 11 total sample. What is the difference between a banking book and a. The difference between the trading and banking book. It acts as part of basel iii, consider to applied on banks wholesale trading activities. The valueatrisk var for assets in the trading book is measured on a 10day time horizon under basel ii. How assets in the trading book and banking book are. Regulators have attempted to address a flaw within basel ii that gave banks an incentive to hold assets in the trading book. Rbc25 boundary between the banking book and the trading book. In the banking book, the basel ii capital requirement formula irb modeling is based on the assumption that the portfolio is infinitely fine grained. At the same time, it aims to address weaknesses previously seen in the boundary between the regulatory banking book and trading book by. Following the global financial crisis, the bcbs initiated an overhaul of market risk capital rules, with the aim of replacing the basel 2. If a bank does an interest rate swap with a customer, thats trading book. In addition to the reforms to the basel ii framework by the basel committee on banking supervision bcbs in 2009 and the amendments made in the european capital requirements directive iii crd iii applicable to eu member states increased capital requirements.

What were the main differences and comparisons between. On january 14, 2016, the basel committee on banking supervision bcbs released revised standards for the minimum capital requirements for market risk 1, which, once adopted by national regulators, will have a significant impact on capital for all banks. The committee has also published pdf 607kb a helpful note explaining the gestation of the new market risk framework and the main changes introduced in the final version the final standards follow the publication of a revised market risk framework in january 2016, and consultation papers. The valueatrisk for assets in the trading book is measured on a. The basel ii agreements bcbs, 2004 define regulatory capital through the. Consisting of a collection of articles written competently and concisely, the book should be on the shelf of those who are not only responsible for implementing the basel ii accords but also work in the trenches on how to validate it with respect to the banking institutions in which they are employed. 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. Basel committee on banking supervision consultative. Enhance minimum capital and liquidity requirement 2.

A trading book is the portfolio of financial instruments held by a brokerage or bank. The revised boundary treatment retains the link between the regulatory trading book and the set of instruments that banks generally hold for trading purposes. The valueatrisk for assets in the trading book is measured on a 10day time horizon under basel ii norms in order to determine the capital requirement. The pillars of basel 2 and 3 for your comparison benefit basel ii three pillars. If an instrument is held for one of the criteria below, it has to be designated as a trading. The revised market risk capital framework is a key component of the committees reform of global regulatory standards in. The trading book is required under basel ii and iii to be markedtomarket on a daily basis. I have read that for what concerns banking book you only compute credit, change in commodity price and exchange rate. Securities and financial contracts that a bank intends to trade, resell or profit from on. What is the difference between the trading book and the banking book of a bank. The sepcifci aspect is the functional relationship between banking book and trading and the risk mittigation process that will transform risk into a notion of property. The standards just want to mitiagte the risk of this kinda transfer being used for capital arbitrage by requiring a matching trade with the external parties though this could be at portfolio.

Trading book vs banking book banks are required to divide their balance sheets between banking and trading books both from regulatory and accounting perspective. Real estate holdings and retail and small business lending must go in the banking book. Basel ii and interim enhancements added provisions that focused on the trading book including complex securities and. In terms of methodologies for the own funds calculation approaches, crr ii. In contrast with the credit risk treatment in the banking book, the trading book. How assets in the trading book and banking book are distinguished. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. Basel iv revised trading and banking book boundary for. The basel committee has finalised its standards pdf 1. Say you have credit risk exposure in the banking book, and you book a hedging trade with the trading book, then this would be an internal risk transfer. A trading book is defined as positions which the bank holds for the purpose of short term gain and which it. The banking book refers to assets on a bank s balance sheet that are expected to be held to maturity. Majority of trading book positions will comprise derivatives swaps, fras, futures etc, bonds, equities and commodities. The difference between the trading and banking book blogger.

Banking book trading book banking book and trading book exposures can be held in trading book only if actively managed and held for trading intent e. Created in 1974 by 10 leading industrial countries and now including supervisors from 27 countries, the basel committee on banking supervision bcbs is responsible for strengthening the resilience of the global financial system, ensuring the effectiveness of prudential supervision and improving. A fundamental objective of frtb is creating a high, impermeable wall that separates the trading and banking books. Hence, basel iii proposes that positions that cannot be easily liquidated or fair valued on a daily basis should be excluded from the trading book. Incentives remain in banking book vs trading book choice. Differences between interest rate risk irr in the banking and. It is the practice of regulated banks to use hlis as counterparties in lending and trading, which interests the financial community in terms of systemic risk, because it contributes greatly to the banks unexpected losses. Basel ii recommendations institutionalise processes that transform risk into a numbericla concept that is capable of becoming a property in its own right. Basel ii was designed to improve the way regulatory capital requirements reflect underlying economic risks and to better reflect financial innovation during the intervening years but it focused primarily on the banking book.

Basel ii is the second of the basel accords, now extended and partially superseded clarification needed by basel iii, which are recommendations on banking laws and regulations issued by the basel committee on banking supervision the basel ii accord was published initially in june 2004 and was intended to amend international banking standards that controlled how much capital banks were. Stress testing for risk control under basel ii sciencedirect. Revised trading and banking book boundary for market risk presumed assignment to the trading book alternative allocation possible through explicit supervisory approval there is a general presumption that any of the following instruments are being held for at least one of the above. Basel iii pillar 3 disclosures report for the quarterly. 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. Analysis of the trading book quantitative impact study october 2009 bank for international settlements the basel committee on banking supervision issued today the results of its recent trading book quantitative impact study, which assesses the impact of the revisions to the 1996 rules governing trading book capital. The valueatrisk for assets in the trading book is measured on a tenday time horizont under basel ii. 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 trading book of the banks refers to assets held by a bank that are regularly traded by the bank. 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. How is internal risk transfer different than moving from. Riskweighted capital is concerned primarily with credit risk. The basel committee on banking supervision bcbs wants to make banks treat the assets in their trading books more like those in their banking books by forcing them to hold increased capital against assets designated for trading historically, lower capital requirements for trading book assets had encouraged banks to shift assets from the more expensive banking book into the trading. The fudametal reie of the tradig book ad emergig markets 2 what is the frtb.

Standardized approach and internal model basel ii and basel iii present two approaches for the definition of mrc. The banking book refers to assets on a banks balance sheet that are expected to be held to maturity. Basel capital rules for banks trading books will shift. The trading book refers to assets held by a bank that are available for sale and hence regularly traded. Changes to the basel ii trading book framework 1 background trading books of financial institutions firms suffered substantial losses in the recent financial crisis but the amount of capital held by those firms against trading book risk was minimal compared to their banking book capital. We can expect to see a lot of models changes and technology data and support services changes at all the trading desks. Possessing a very rare combination of skills in banking, risk management and it, over the last four years he has. Its internal ratingsbased approaches to capital regulation will allow large banks to use their own credit risk models to set minimum capital requirements. The trading book is required under basel ii and iii to be marked to market daily. Basel committee on banking supervision consultative document. Finalised in january 2016 as the minimum capital requirements for market risk, it aims to address a. Can you give us a very brief overview of the trading book and banking book revisions within the revised basel market risk framework. In 2005, basel ii was supplemented by a consensus document governing the treatment of banks trading books which was.