Module: | MODULE B: RISK MANAGEMENT
Q280: Consider the following statements regarding the core characteristics and accounting principles of the Banking Book:
1. Assets held in the banking book are primarily intended to be held until maturity, and are not subjected to daily mark-to-market valuations.
2. Securities classified under the Held to Maturity category form a major component of the banking book, and are accounted for on an accrual basis.
3. Any adverse movement in the market price of an asset in the banking book, immediately impacts the bank's daily profit and loss account.
Which of the statements given above is/are correct?
2. Securities classified under the Held to Maturity category form a major component of the banking book, and are accounted for on an accrual basis.
3. Any adverse movement in the market price of an asset in the banking book, immediately impacts the bank's daily profit and loss account.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The defining feature of the Banking Book is that it contains assets (like term loans and specific investments) held for long-term yield rather than short-term trading profit.
Consequently, they are exempt from daily Mark-to-Market (MTM) volatility.
Statement 2 is correct: Investments classified as Held to Maturity (HTM), which typically include SLR securities, are an integral part of the Banking Book.
They are strictly recorded at historical cost and accounted for on an accrual basis.
Statement 3 is incorrect: Because Banking Book assets are accounted for on an accrual basis rather than MTM, daily fluctuations in their market prices do not hit the bank's daily Profit & Loss account.
Only trading book assets immediately impact the P&L through daily MTM valuations.
Consequently, they are exempt from daily Mark-to-Market (MTM) volatility.
Statement 2 is correct: Investments classified as Held to Maturity (HTM), which typically include SLR securities, are an integral part of the Banking Book.
They are strictly recorded at historical cost and accounted for on an accrual basis.
Statement 3 is incorrect: Because Banking Book assets are accounted for on an accrual basis rather than MTM, daily fluctuations in their market prices do not hit the bank's daily Profit & Loss account.
Only trading book assets immediately impact the P&L through daily MTM valuations.