In the last article, we mapped the boundary between the trading book and the banking book — which instruments belong where, and how tightly banks are restricted from physically moving instruments between the two. But there is a second, related mechanism the standard deals with separately: what happens when a bank does not move an instrument, but instead uses one book to hedge a risk sitting in the other book. This is called an internal risk transfer, and it is the subject of RBC25.18 through RBC25.34.
This topic is dense enough that we are splitting it into four short, focused parts — A, B, C and D — so each piece stays easy to follow. This is Part A: the basic definition, and the single most important rule in the entire topic, which applies before any of the detailed conditions in the later parts even come into play.
What Is an Internal Risk Transfer?
The standard defines an internal risk transfer simply: it is an internal written record of a transfer of risk. This transfer can happen in three possible directions:
- Within the banking book — from one banking book exposure to another.
- Between the banking book and the trading book — in either direction.
- Within the trading book — between two different trading desks.
Notice what is not happening here: no instrument is being sold, bought, or physically reassigned to a different book. The bank is simply creating an internal record that says, in effect, “desk A is now carrying risk that originated in desk B, or in a different book.” Because no real transaction with an external counterparty has taken place, regulators treat these internal records with a great deal of caution — an internal record, on its own, does not automatically earn any capital benefit.
Sourced from RBC25.18.
The One-Way Door: Trading Book to Banking Book Gets Nothing
This is the single most important rule to understand before anything else in this topic: if a bank internally transfers risk from the trading book to the banking book, that transfer receives zero regulatory capital recognition.
| Why This Matters in Plain Terms Imagine a trading desk decides, for its own economic or business reasons, to internally record that a risk it was carrying now belongs to the banking book instead. Under RBC25.19, regulators simply ignore that internal record when they calculate capital requirements. In practice, this means the trading book position keeps being capitalised under market risk rules exactly as if the internal transfer had never happened. The bank cannot use an internal record alone to shift a risk out of the more punitive trading book treatment and into the banking book. |
| “…this internal risk transfer would not be taken into account when the regulatory capital requirements are determined.” — Basel Committee on Banking Supervision, Minimum Capital Requirements for Market Risk, RBC25.19 |
The standard gives a specific example of when this comes up: a bank might want to make this internal transfer purely for economic reasons — for instance, to manage risk internally in a way that makes business sense. That motivation is not in question. What the rule establishes is that however sound the internal business logic, it has no bearing on the regulatory capital outcome. The trading book side of the ledger does not get to quietly hand off its capital charge to the banking book through an internal note.
Sourced from RBC25.19. https://www.bis.org/bcbs/publ/d457.htm
The Other Direction Is Not Automatic Either
It would be a mistake to read the above and assume the reverse direction — banking book to trading book — is therefore straightforward or automatically recognised. It is not. The standard is equally strict here, just for different reasons and through a different set of conditions.
RBC25.20 signals this directly: for internal risk transfers moving from the banking book into the trading book, an entirely separate set of detailed conditions applies, covering credit risk, equity risk, and interest rate risk hedges individually. Each risk type has its own exact-matching requirements that must be satisfied before any capital recognition is granted.
Sourced from RBC25.20.
The Big Picture So Far
| Direction of Transfer | Capital Recognition |
| Trading book → Banking book | None. Always ignored for capital purposes, regardless of the bank’s reason (RBC25.19). |
| Banking book → Trading book | Possible, but only if detailed conditions are met — covered risk type by risk type in Parts B and C of this mini-series (RBC25.21–25.27). |
| Within the trading book (desk to desk) | Possible, generally recognised, with a specific carve-out for transfers involving a dedicated internal risk transfer desk — covered in Part D (RBC25.28–25.29). |
| Within the banking book | Governed by the banking book’s own credit risk framework, outside the scope of this market risk series. |
What’s Next in This Mini-Series
Now that the basic definition and the one-way door rule are clear, the next two parts work through exactly what a bank must do to earn capital recognition when hedging banking book risk using the trading book:
- Part B covers credit and equity risk transfers from the banking book to the trading book (RBC25.21–25.24), including the exact-matching test for external hedges.
- Part C covers interest rate risk (GIRR) transfers from the banking book to the trading book (RBC25.25–25.27), which work through a dedicated, supervisor-approved desk.
- Part D covers internal risk transfers within the trading book itself, and the special rules for risk transfers involving the CVA (credit valuation adjustment) portfolio (RBC25.28–25.34).
Frequently Asked Questions
What is an internal risk transfer under FRTB?
It is an internal written record of a transfer of risk — within the banking book, between the banking and trading book, or between desks within the trading book — without any instrument physically changing hands with an external party.
Does moving risk from the trading book to the banking book reduce capital?
No. Internal risk transfers from the trading book to the banking book receive zero regulatory capital recognition. The trading book position continues to be capitalised under market risk rules exactly as before.
Is moving risk from the banking book to the trading book automatically recognised?
No. It is only recognised if specific, detailed conditions are met, which differ depending on whether the risk is credit, equity, or interest rate risk. These conditions are covered in Parts B and C of this mini-series.
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