Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition

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 ...