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FRTB - The democratization and level playing field for the Trading book and Banking book

FRTB can be summarized in three lines as follows:

-          Close the loop hole of Capital Arbitrage between the Trading and the Banking books

-          Calculate the Capital as if the banks are in Stressed Market Conditions

-          Calculate Capital using the Standardized Approach, even though Trading desks calculate the Capital Charge using internal Models approach.


What are the issues with the classification of the “trading book and banking book” boundary

There has been a lot of discussion on how FRTB will define what is a banking book and what is a trading book. So here are the definitions on how to treat a position either as a banking book or a trading book.

The loose definition of the regulatory boundary has been a source of weakness, and banks have been defining whether a book would be a banking book or trading book, based upon their self-determined intent to trade. This was also exacerbated with a large difference in capital requirements on either, such that the overall capital framework became arbitrary and susceptible to abuse and arbitrage.


The intent of the regulation is to allocate the instruments into the prudential capital regime that is best equipped to deliver an appropriate capital charge for that instrument/portfolio. Main points that the BCBS considered while deciding the Trading / Banking book boundaries are:

  • The degree to which capital arbitrage opportunities can be mitigated
  • The extent that the arbitrate opportunity and the boundary be made less permeable.
  • Ease of understanding and application.
  • The extent to which a bank can align the boundary guidelines with its own internal policies.


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