Economic Capital Foundations
Stress Testing Foundations
Counterparty Credit Risk
Interest Rate Risk in the Banking Book
Market risk is concerned with the risks associated with traded financial instruments, market-based products and investments. Following accounting and regulatory standards, banks partition their activities into trading book (market-based) and banking book (lending- and deposit-based) activities. More about the distinction between the two books can be found in Panel 5.1. This chapter is concerned with determining trading book risks. The importance of market risk within a bank is dependent on its reliance on market-based activities. For investment banks, market risk would be a key risk, since it would be reliant on trading financial instruments. The bank would have to hold positions to meet client needs, thus exposing them to potential extreme market moves.
That is not to say that retail and commercial banks are not exposed to market risk. Prevailing interest rates can have an effect on the profitability of lending and deposit activities. Changes in foreign exchange (FX) rates can have an effect on the profitability of international retail and commercial banking activities if the group is headquartered in a different country. Furthermore, treasury functions withi