Incentives remain in banking book vs trading book choice
Regulators have attempted to address a flaw within Basel II that gave banks an incentive to hold assets in the trading book. But Basel 2.5 may have gone too far, and made it more attractive to place assets in the banking book instead. By Giovanni Pepe
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The ability of banks to use their own internal models to determine regulatory capital requirements has come under huge scrutiny recently. The Basel Committee on Banking Supervision is currently considering introducing a number of constraints on bank internal ratings-based (IRB) model parameters, following two reports that showed wide variations in bank risk-weighted asset (RWA) numbers (BCBS, 2013 (a, b)). Some domestic supervisors have already taken the
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