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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Bank accounting: Accrual vs. marked-to-market

Bank accountants classify transactions into two categories:

  • the banking (or accrual) book;

  • the trading book.

  1. The key accounting characteristic of the banking book is that loans, deposits and bonds (investment portfolio[1]) are recorded at their historical cost (i.e. a loan of 1 million remains recorded at 1 million over the life of the loan). The key consequence for the profit and loss account is that the banking book generates a net interest margin (NIM) which is the difference between the interest received and the interest paid. Since the net interest margin is usually a major component of a bank’s P&L, the impact of interest rate risk on the NIM has to be analysed very carefully.

    [1] Bonds are recorded ...

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