Actuarial Outpost
 
Go Back   Actuarial Outpost > Exams - Please Limit Discussion to Exam-Related Topics > SoA > Corporate Finance and ERM (CFE) Track > ERM Exam
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Berlin - Madrid - Rome - Paris - Hamburg - Warsaw
Barcelona - Vienna - Milan - Munich - Prague - Cologne
Actuarial Jobs in Europe
Athens - Amsterdam - Frankfurt - Copenhagen
Hannover - Dublin - Brussels - Lyon - Zurich


ERM Exam Old Advanced Finance and Enterprise Risk Management (ERM) Forum

Reply
 
Thread Tools Display Modes
  #1  
Old 04-02-2009, 04:13 AM
wat?'s Avatar
wat? wat? is offline
Member
SOA
 
Join Date: May 2004
Location: Hi
Studying for Foundations of CFE
Posts: 30,686
Default Trading Book vs. Banking Book

I understand this is probably a straight-forward question, but could someone explain what a trading book and a banking book is? I saw it mentioned numerous times in Risk Management and I tried my best to reason through it by context, but couldn't figure it out in a general sense.

Even a page # or something would help. Thanks!
__________________
"Mathematical Induction: How mathematicians manage to suck all the fun out of lining up a row of dominos, knocking the one on the end down, and watching the entire row fall." -BC
Skip it. - AG

Because everything should taste like bacon.
AO Golfers Unite! Here and here.
Reply With Quote
  #2  
Old 04-02-2009, 08:41 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 58,992
Blog Entries: 5
Default

Here's some links with definitions:
http://www.wisegeek.com/what-is-a-trading-book.htm

http://www.investorwords.com/6739/banking_book.html
Reply With Quote
  #3  
Old 04-02-2009, 09:53 AM
PAK's Avatar
PAK PAK is offline
Eddy Chan, FSA, CERA, MAAA
SOA AAA
 
Join Date: Aug 2006
Favorite beer: Saki
Posts: 2,746
Default

Quote:
Originally Posted by wat? View Post
I understand this is probably a straight-forward question, but could someone explain what a trading book and a banking book is? I saw it mentioned numerous times in Risk Management and I tried my best to reason through it by context, but couldn't figure it out in a general sense.

Even a page # or something would help. Thanks!
Read the footnote #17 on p.93 in Risk Management textbook
Reply With Quote
  #4  
Old 04-02-2009, 02:13 PM
Diane Diane is offline
 
Join Date: Mar 2008
Posts: 26
Default

Hi,

While I'm sure there are many formal definitions, the fundamental distinction is quite straightforward:

- the banking book comprises all of the core business of the bank: lending and retail
- the trading book comprises anything you think of as trading - incl. OTC derivatives and market-making activities

The biggest distinction between them for risk purposes include:
- the trading book is typically MtM while the lending book is held at book value / buy&hold
- the trading book is (before this crisis) more liquid than the banking book

There are some complex rules about where certain derivatives are held. Basically, if you can show evidence that a derivative is an appropriate hedge to something in the banking book, you may "move" it to the banking book so that the cash flows / valuation methodologies match.

I do recommend you follow up on all the links as there is actually quite fine line between the two areas in practice. However, the broad distinction is quite natural.
Reply With Quote
  #5  
Old 04-02-2009, 05:16 PM
wat?'s Avatar
wat? wat? is offline
Member
SOA
 
Join Date: May 2004
Location: Hi
Studying for Foundations of CFE
Posts: 30,686
Default

Thanks all - this helps quite a bit.
__________________
"Mathematical Induction: How mathematicians manage to suck all the fun out of lining up a row of dominos, knocking the one on the end down, and watching the entire row fall." -BC
Skip it. - AG

Because everything should taste like bacon.
AO Golfers Unite! Here and here.
Reply With Quote
Reply

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 08:09 PM.


Powered by vBulletin®
Copyright ©2000 - 2014, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.29536 seconds with 7 queries