What is the difference between the trading book and the banking book for a bank?

Basics of a Trading Book This differs from a banking book as securities in a trading book are not intended to be held until maturity while the securities in the banking book are going to be held long-term. Securities held in a trading book must be eligible for active trading.

What is included in the trading book of a bank?

A financial institution’s trading book comprises assets intended for active trading. These can include equities, debt, commodities, foreign exchange, derivatives and other financial contracts.

How is the capital requirement measured for assets on our trading book?

The value-at-risk for assets in the trading book is measured on a 10-day time horizon under Basel II norms in order to determine the capital requirement. The value-at-risk (VaR) for assets is measured at a 99.9\% confidence level on a one-year horizon.

How do you calculate net interest income?

A bank calculates its net interest income by subtracting the amount of interest-bearing liabilities from its interest-bearing assets.

What is an example of a trade book?

Trade book is defined as a book that is to be sold to the public through booksellers. An example of a trade book is a bestselling novel in a paper cover. (publishing) A book that is marketed to a general audience (as opposed to books that have specialized audiences, such as academic books).

What does book trade mean?

noun The buying and selling of books; the business of printing and publishing books. noun Those, collectively, who are engaged in this business.

What is interest rate risk in banking book?

Interest rate risk in the banking book (IRRBB) refers to the current or prospective risk to the bank’s capital and earnings arising from adverse movements in interest rates that affect the bank’s banking book positions. When interest rates change, the present value and timing of future cash flows change.

How is bank net interest income calculated?

Net interest income (NII) is the difference between revenues generated by interest-bearing assets and the cost of servicing (interest-burdened) liabilities.

What is the difference between interest earned and interest paid?

Earned interest is the rate of interest that an investment is earning for you. You accrue interest all month and you receive it on the payment date. Paid interest is interest that you have received as payment into your account; at that point it is no longer accrued interest.

What is the difference between trading book and banking book?

Trading Book vs Banking Book Banks are required to divide their balance sheets between banking and trading books (both from regulatory and accounting perspective). A trading book is defined as positions which the bank holds for the purpose of short term gain and which it can close when markets conditions are favourable.

What is the value-at-risk for assets in the trading book?

The value-at-risk for assets in the trading book is measured on a 10-day time horizon under Basel II norms in order to determine the capital requirement. There are three major differences between trading books and banking books. The assets are marked to market on daily basis.

How does accounting affect risk in trading and banking?

Accounting does not affect risk, you analyze risk the same for trading and banking book. But for regulatory and accounting purposes, the banking book has minimal interest rate risk, while the trading book interest rate risk an be estimated with some accuracy from market price moves.

How is capital charge for banking book calculated?

Capital charge for banking book gets calculated from RWA (risk weighted assets).The value-at-risk for assets in the banking book are calculated at a 99.9\% confidence level on a one-year horizon. Currently there are no specific rules are defined to classify trades into banking and trading books.