Question 15.10: What is the difference between the trading book and the bank...
What is the difference between the trading book and the banking book for a bank? A bank currently has a loan of $10 million to a corporate client. At the end of the life of the loan, the client would like to sell debt securities to the bank instead of borrowing. How does this potentially affect the nature of the bank’s regulatory capital calculations?
The trading book consists of instruments that are actively traded and marked to market daily. The banking book consists primarily of loans that are held to maturity and not marked to market daily. The effect of the change is to move the client’s borrowings from the banking book to the trading book. This typically reduces capital requirements. (However, the incremental risk charge in Basel II.5, which is discussed in Chapter 16, brings capital requirements back up to where they were before.)