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?

  • $\begingroup$ Your question fills various book. As a first start you could do research on the difference between the banking book and the trading book and you would find things like this: erikjohansson.blogspot.com/2012/05/… $\endgroup$
    – Richi Wa
    Commented Jun 18, 2018 at 14:26
  • $\begingroup$ Thanks a lot for your reply. Actually, I know the difference between banking and trading book. The problem is that I cannot understand the specific point from a regulatory point of view having regard to Basel III: which risks are covered for the banking book? $\endgroup$
    – Klapaucius
    Commented Jun 19, 2018 at 15:18

1 Answer 1


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.


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