Banking book: Difference between revisions
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Revision as of 12:41, 1 December 2019
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Banking book is one of two main books which hold distinct banking activities. There are no market identifiers in the banking book but there are assets for which corporate, retail and bank counterparties are represented. Accounting treatment for the banking book is in line with the accrual concept, which allows for the accounting of interest flows as they arise. The important thing is that the type of business activity determines whether it will be included in the banking book, not the type of counterparties or the section of the bank that is carring it out[1]. According to M. Choudhry "Assets and liabilities on the banking book generate interest-rate and credit risk exposure for the bank. They also create liquidity and term mismatch risk. Liquidity refers to the ease with which funds can be raised in the market"[2].
Activities of banking book
The banking book usually contains traditional banking activities, which include lending to individuals, companies and other banks. Thus interact with investment operations.
The activities referred to are[3]:
- lending and borrowing money (commercial banking loans),
- holding and issuing securities,
- gathering deposits .
Differences in banking books
In addition to the banking book, there is also a trading book. At first glance, the distinction between banking book and trading book is not exact and clear, but "the primary difference between two books is that the overriding principal of the banking book is one of "buy and hold" - that is, a long term acquisicion. Assets may be held on the book for up to 30 years or longer. The trading book is just that, it employs a trading philosophy so that assets may be held for very short terms, less than 1 day in some cases"[4].
The portfolios of the banking and trading books consist of[5]:
| Banking book | Trading book |
|---|---|
| Bonds | Bonds |
| Term deposits | Term deposits |
| Loans | Interest rate swaps |
| Own bond issues | |
| Interest rate swaps |
A set of these two portfolios may be used to describe the model bank. According to G. Gebhardt, R. Reichardt and C. Wittenbrink "...in order to optimise the bank’s activities in the financial markets, interest rate swaps are only traded externally out of the trading book and internally between the trading book and the banking book. Term deposits, on the other hand, are only traded externally out of the banking book and internally between the banking book and the trading book. Bonds are directly bought into and sold out of both the banking and trading book"[6].
Footnotes
References
- Alexander C. (2009), Market Risk Analysis, Value at Risk Models, John Wiley & Sons
- Choudhry M. (2012), The Principles of Banking, John Wiley & Sons
- Choudhry M. (2018), An Introduction to Banking: Principles, Strategy and Risk management, John Wiley & Sons
- Gebhardt G., Reichardt R., Wittenbrink C. (2004), Accounting for financial instruments in the banking industry: Conclusions from a simulation model European Accounting Review, nr. 21
- Gup B.E. (1999), International Banking Crises: Large-scale Failures, Massive Government Interventions Greenwood Publishing Group, Westport, Connecticut, London
Author: Dominika Kania
