If a bank does an interest rate swap with a customer, thats trading book. Onesumx asset and liability management alm wolters kluwer. How can a mediumsized bank develop its own assetliability. Frtb still builds on the intent based criteria for tradingbanking book. Strategic alm and integrated balance sheet management. The portfolio of financial instruments in the trading book may be resold to benefit from shortterm price fluctuations, used for hedging or traded to fulfil the firms or clients needs. These securities are accounted for in a different way than those in the trading book, which are traded on the market and valued by the performance of the market. In an environment of low interest rates and expansionary monetary policy, there is increased competition around loan and deposit businesses, as well as moves to integrate trading book assets and liabilities into the alm framework. At that time alm meant market risk management, and everybody had to know the jp morgan model. Apr, 2007 banks are a vital part of the global economy, and the essence of banking is assetliability management alm. Ambit focus market risk module allows quantifying and monitoring market risks across both trading and banking book. Revised trading and banking book boundary for market risk 11 total sample.
Trading book activity generates the same risk exposure as that on the banking book, including market risk, credit risk and liquidity risk. General expectations for the identification and management of. Deloitte alm survey of european banks practices 2019. Key modelling challenges anshuman, can you please tell the center for financial professionals audience about yourself and your professional experience. Can you give us a very brief overview of the trading book and banking book revisions within the revised basel market risk framework. Aquantec ocean integrates in a single system the entire spectrum of functionality required to help firms building and maintaining a robust alm framework. In the 2000s the advancement in the theory and the technology of risk analysis and it databases created advanced risk management in the banking book, which in turn is. Rbc25 boundary between the banking book and the trading book. Financial instruments in a trading book are purchased or sold for reasons including to. Reassignments are more difficult, so it is critical that banks get it right the first time. In recent years, there has been increased focus on the universal banking model as well as new regulations focusing on asset and liability management alm practices. We often divide the bank balance sheet in two parts.
A reference text for all those involved in banking and the debt capital markets, it describes the techniques, products and art of alm. These securities are accounted for in a different way than those in the trading book, which are traded on. An accounting book that includes all securities that are not actively traded by the institution, that are meant to be held until they mature. What is the difference between a banking book and a trading. Alm should provide the information and means to test and analyze strategies to minimize risk and to maximize profitability. In the 2000s the advancement in the theory and the technology of risk analysis and it databases created advanced risk management in the banking book, which in turn is advancing the state of the art in alm field. Much trading book activity involves derivative instruments, as opposed to cash products. Basel iv revised trading and banking book boundary for market. In 2018 new basel standards were introduced for measuring and managing interest rate risk on the banking book irrbb.
Where alm in the past was focused on interest rate risk, today more holistic balance sheet risk management is required. Basel iv revised trading and banking book boundary. This book is an entire treatment of an needed financial market selfselfdiscipline. Basel iv revised trading and banking book boundary for. The handbook of alm in banking provides a full overview of methods and methodologies being applied in cuttingedge alm management. Boot and lev ratnovski1 authorized for distribution by stijn claessens october 2012 abstract we study the effects of a banks engagement in trading. Mapping of all relevant banking book positions in one appropriate alm or treasury system for the representation of all risk and result components. Basel committee on banking supervision consultative document. The trading book of the banks refers to assets held by a bank that are regularly traded by the bank. Establishment of an adequate indicator and management reporting system on the basis of a.
Interest rate risk management for the banking book. Banks are a vital part of the global economy, and the essence of banking is asset liability management alm. Banks are a vital part of the global economy, and the essence of banking is assetliability management alm. The handbook of alm in banking 2nd edition risk books. Interest rates, liquidity and the balance sheet by risk books paperback, 2014 at the best online prices at ebay. Strategy trading analysis moorad choudhry banks are a vital part of the global economy, and the essence of banking is assetliability management alm. In early 2016, svilen assumed additional responsibilities as a sr. Handbook of asset and liability management wiley online library. One of the most visible updates to the trading book regime is the revised trading banking book boundary. The precise answer is both complex and involves considerable latitude for opinion. The handbook of alm in banking 2 nd edition provides a comprehensive overview of stateoftheart asset and liability modelling, risk management techniques and transfer pricing. A trading desk still deals in assets and liabilities, and these must be managed for interest rate risk and liquidity risk. Although the basic tenets of alm would seem to apply more to commercial banking than investment banking, in reality it is important that it is applied to both functions.
Subjects covered include bank capital, money market trading, risk. I am currently a managing director at moodys copal amba and head their risk management services practice. Hedge accounting for risk management derivative products. A trading book is the portfolio of financial instruments held by a brokerage or bank. The main products on alm desk are money market instruments as time deposits, loans, cds etc. A financial institutions trading book comprises assets intended for active trading. Interest rate risks within the banking book, however, remained untouched until now.
Banking book assets and liabilities are classed into two blocs. Assetliability management is the process of managing the use of assets and cash flows to meet company obligations, which reduces the firms risk of loss due to not paying a liability on time. 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. Differences between interest rate risk irr in the banking and. The book considers the aspects key to these issues. We at alm partners model and analyse the development of interest income and the associated interest rate risk. Key features of aquantec ocean for assetliability management. How assets in the trading book and banking book are. New regulations, which require a more consistent treatment of banking books and trading books as well as more aligned business strategies, call for the integrated management of assets and liabilities in banks. This book introduces the key concepts of banking, concentrating on the application of robust risk management principles from a practitioner viewpoint, and how to incorporate these principles into bank strategy.
The center for financial professionals is an international research organization and the focal point for financial risk professionals to advance through renowned thoughtleadership, knowledge sharing, unparalleled networking, industry solutions and lead generation. The handbook of alm in banking 2nd edition provides a comprehensive overview of stateoftheart asset and liability modelling, risk management techniques and transfer pricing. This book is a mustread for alm managers, risk managers, balance sheet managers, accountants, treasurers. New regulations, which require a more consistent treatment of banking books and trading books as well as more aligned business strategies, call for the integrated management of assets and. Nov 12, 2019 assetliability management is the process of managing the use of assets and cash flows to meet company obligations, which reduces the firms risk of loss due to not paying a liability on time. The handbook of alm in banking financial capital market. Banks are an essential part of the worldwide monetary system, and the essence of banking is assetobligation administration alm. The trading book is required under basel ii and iii to be marked to market daily. The trading book refers to assets held by a bank that are available for sale and hence regularly traded. In order to distinguish between alms banking book and the trading book. It is focused on a longterm perspective rather than mitigating. The traditional approach to assetliability management alm practice in banks operated as a reactive process following product origination by the customerfacing business. A handbook on asset liability management alm and total bank management. The difference between the trading and banking book.
What is the difference between a banking book and a. Director of enterprise liquidity and nontrading market risk, focusing on building a global oversight function for all treasury and banking book related liquidity and market risk exposures. A global regulatory framework for more resilient banks. General expectations for the identification and management of credit spread risk in the non trading book csrbb. A reference text for all those involved in banking and the debt capital markets, it describes the. The handbook of alm in banking provides a complete overview on good practices for asset and liability management in banking. The trading book is an accounting term that refers to assets held by a bank that are regularly traded. Interest rate risk, both in the banking and the trading book cannot be viewed in isolation from liquidity risk, funds transfer pricing, or capital management.
This chapter sets out the instruments to be included in the trading book which are subject to market risk capital requirements and those to be. The scope of irrbb is extended by the credit spread risk, nonperforming and offbalance sheet exposures. Alm sits between risk management and strategic planning. With respect to internal risk transfers, specialized banks committee e. Asset and liability management often abbreviated alm is the practice of managing financial risks that arise due to mismatches between the assets and liabilities as part of an investment strategy in financial accounting. Course agenda alm and balance sheet management toronto. What is the difference between the trading book and the banking book of a bank. First, unlike the usual practice of restricting alm to the control of interest rate and liquidity risks, we proppose a framework to analyse both value creation and the control of risks. The foundation of consistently successful banking practice remains efficient assetliability management and liquidity risk management. One of the complexities of interest rate risk on the balance sheet is the linkage between asset liability management alm, liquidity lrp, nsfr, and the irrbb. In the basel iii era a more proactive approach to alm is required, in order to manage the balance sheet from an effective viability and sustainability standpoint. Cfp is driven by and dedicated to high quality and reliable primary market research. Jun 07, 2017 the precise answer is both complex and involves considerable latitude for opinion. Basel committee on banking supervision consultative.