The banking book is the part of a bank's balance sheet that holds positions the bank intends to keep rather than trade: customer loans, deposits, interbank lending and most of its securities portfolio, along with the hedges used to manage them. It is defined in contrast to the trading book, which contains instruments held for short-term resale, market making or hedging trading activity.
The split matters because the two books are treated differently in prudential regulation and often in accounting. Banking book assets attract capital mainly for credit risk, while trading book positions attract capital for market risk. The rules for drawing the line between them are set by the Basel Committee on Banking Supervision, and the largest risk unique to the banking book, interest rate mismatch, is covered under interest rate risk in the banking book.
Banking book in plain terms
Imagine a bookshop that also runs a small stall buying and selling rare books for quick profit. The shop's main stock is ordered to be sold to readers over months and years; the stall's stock is bought one morning and sold the next week. Mixing the two would make it hard to see how the business is really doing.
A bank keeps two such "books". The banking book is the main shop: loans it makes and expects to be repaid, and the deposits that fund them. The trading book is the stall: bonds, currencies and derivatives it buys and sells for short-term gain or to serve trading clients.
What sits in the banking book
- Loans. Mortgages, corporate and consumer loans, and credit lines, usually held at amortised cost.
- Deposits and funding. Customer deposits, wholesale borrowing and issued debt on the liabilities side.
- Investment securities. Government and corporate bonds held for liquidity or yield, including those classified as held to maturity or available for sale in US accounting.
- Hedges. Interest rate swaps and other derivatives entered into to manage banking book risk, often under hedge accounting.
For a typical retail or commercial bank, the banking book is almost the whole balance sheet, and the trading book is small or absent. A large trading book is mainly a feature of universal and investment banks that make markets in bonds, currencies and derivatives for clients. Because the banking book is where deposits are turned into loans, its performance drives most of a commercial bank's earnings through net interest margin, while trading book results show up as trading income. Supervisors therefore look at the banking book first when judging the health of most banks.
The boundary with the trading book
Banks once had wide discretion over which book a position belonged in, which allowed them to move assets to where capital charges were lower. The Basel Committee's Fundamental Review of the Trading Book, published in 2016 and revised in 2019, tightened the boundary. It sets presumptions about which instruments belong in each book, requires documented trading intent for trading book positions, and makes it hard to move positions between books: any switch needs supervisory approval and cannot reduce capital requirements. Internal risk transfers, for example when the banking book hedges its interest rate risk through the bank's own trading desk, must follow specific rules.
Risks in the banking book
Credit risk is the largest banking book risk, covered by loan loss provisions and capital held against risk-weighted assets. The second is interest rate risk, because assets and liabilities reprice at different times; this is managed by the asset-liability committee and through funds transfer pricing, which charges or credits business lines for the funding they use or supply. Banking books also carry liquidity risk, credit spread risk on securities, and concentration risk. Because most banking book assets are not marked to market, falls in their market value may not appear in reported profits.
Accounting and the 2023 bank failures
Accounting labels do not always match the regulatory books, but in practice many banking book securities are held at amortised cost. When interest rates rose sharply in 2022, the market value of long-dated bonds fell, leaving many banks with large unrealised losses that did not reduce reported capital at most banks. At Silicon Valley Bank, which failed in March 2023, selling part of its securities portfolio to raise cash turned such losses into realised ones and helped trigger the run. The episode renewed attention on banking book interest rate risk, on the treatment of accumulated other comprehensive income in capital, and on how quickly banking book assets could be turned into cash if depositors withdrew.