Skip to content

FRM Part II · FRM Exam Part II · Range of Practices and Issues in Economic Capital Frameworks

A bank estimates economic capital for interest rate risk in the banking book. Which feature of this risk type most complicates its measurement relative to trading book market risk?

Banking book interest rate risk is harder to measure because it depends on behavioral assumptions, such as the repricing of non-maturity deposits and loan prepayments, and on long holding periods. Unlike trading positions, these are not marked to market daily, so cash flows are uncertain.

  1. APositions are marked to market daily, so P&L is observable
  2. BBehavioral assumptions on non-maturity deposits and prepayments, plus long holding periods, affect the cash flow profileCorrect
  3. CInterest rate risk cannot be affected by changes in the yield curve slope
  4. DBanking book positions are always hedged one-for-one

Explanation

Banking book positions are held to maturity and are not marked daily, so measurement depends on behavioral assumptions about deposits and prepayments over long horizons. Banking book exposures are sensitive to curve slope, and hedging is not one-for-one by default.

Did you get it right without looking?

One question tells you little. A timed set on Range of Practices and Issues in Economic Capital Frameworks shows your real accuracy, how long you take and where you lose marks.

Practise Range of Practices and Issues in Economic Capital FrameworksFree diagnostic mock

More Range of Practices and Issues in Economic Capital Frameworks questions