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CMA Final · Risk Management in Banking and Insurance · Market Risk Management

Under the Basel framework, which of the following correctly describes the 'banking book' versus 'trading book' distinction for market risk capital purposes?

The trading book contains instruments held with trading intent or as hedges against such positions, and these attract the market risk capital charge. Banking book items such as loans held to maturity are treated differently, and profitability gives no exemption from market risk capital.

  1. AThe trading book holds instruments kept with trading intent or to hedge trading positions, and attracts market risk capital chargesCorrect
  2. BThe banking book holds only instruments intended for short-term resale and attracts market risk charges
  3. CThe trading book holds only loans held to maturity
  4. DBoth books are exempt from market risk capital if the bank is profitable

Explanation

The trading book comprises financial instruments held with trading intent or to hedge other trading book items, and these positions are subject to the market risk capital charge. Loans held to maturity sit in the banking book, so option C reverses the definition. Profitability does not exempt a bank from the charge.

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