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

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Old 04-02-2009, 03:13 AM
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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!
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Old 04-02-2009, 07:41 AM
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Mary Pat Campbell
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Here's some links with definitions:
http://www.wisegeek.com/what-is-a-trading-book.htm

http://www.investorwords.com/6739/banking_book.html
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Old 04-02-2009, 08:53 AM
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Eddy Chan, FSA, CERA, MAAA
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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
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Old 04-02-2009, 01:13 PM
Diane Diane is offline
 
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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.
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Old 04-02-2009, 04:16 PM
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Thanks all - this helps quite a bit.
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