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Basel Market Risk Across Trading and Banking Books

Article Quant Q&A · Author: Klapaucius
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Summary

The document gives a brief, high-level comparison of market risk topics associated with a bank’s trading and banking books. It describes the trading book as capital markets and investment banking positions, such as swaps, stocks, and bonds, and the banking book as commercial or retail positions such as loans and guarantees. For market risk measurement, it lists sensitivities including delta, gamma, and vega, alongside value at risk.

It distinguishes related risk categories: counterparty credit exposure measures, credit valuation adjustment, and liquidity measures are mentioned separately. For banking-book market risk, the response highlights gap risk and differences between collateral value and a lender’s assessed value, as well as spread movements. The account is intentionally broad and should not be read as a complete statement of Basel III requirements: it provides no formal definitions, calculation rules, regulatory boundaries, or detailed measurement framework.

Key ideas

  • The response associates trading-book market risk with sensitivities and value at risk.
  • It characterizes the banking book through commercial and retail exposures, including loans and guarantees.
  • Counterparty credit, credit valuation adjustment, and liquidity are identified as related but distinct risk areas.
  • The response points to gap and spread risk as banking-book concerns.
  • The overview does not specify Basel calculation standards or fully define regulatory scope.

Tags

Risk managementFixed incomeMulti-asset
Full text
# Market Risk - Trading and Banking book in light of Basel III


# Market Risk - Trading and Banking book in light of Basel III












I can not understand whether Basel III (in the part of market risk) applies both to Trading Book and Banking book or just to the first one.

I have read that for what concerns Banking book you only compute credit, change in commodity price and exchange rate. But I am not fully sure about this.

Could you synthesize in few lines the approaches to trading and banking book for what concerns Market risk and how to measure it?

## Answer by Varun (score 2)

https://quant.stackexchange.com/a/45568

High level Answer:

Trading Book: All the books held in Capital Markets or Investment Banking Division of a Bank. Instruments will include:Swaps, Stocks, Bonds, etc. Banking Book: All the books held in Commercial or Retail Banking Division of a Bank. Instruments will include:Loans to corporates, Bank Guarantees, etc.

Market Risk Measure: Sensitivities like delta, gamma, vega, theta, vanna, volga, etc. and Value at Risk (VaR)

Counterparty Credit Risk Measures: PFE,EE,EPE,Credit VaR, PD and LGD.

Market Risk in Credit Risk Measure: CVA.

Liquidity Risk: LCR, NSFR, etc.

Answer to @Matias J.:

Market Risk in Banking Book: Most common is called GAP risk. This is difference in collateral value (Book Value - Value Computed by the Lender). Other types can be different spread risk. This can be defined as risk of movement of the underlying value as perceived by the lender vs market value of the underlying.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.