The banking book is an accounting set of records that includes all securities that are not actively traded by the institution, that are meant to be held until they mature. These securities are accounted for in a different way than those in the trading book, which are traded on the market and valued by the performance of the market.

Limits should be based on a plethora of things, but the key consideration is and will always be the perceived ability of the customer to repay.

The advantage of having limits in place is to control exposure and to present warning signs against which to manage changing counterparty risk.

It is vital that all the limits are regularly monitored and acted upon if breached.

VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level.

Confidence intervals are used to indicate the reliability of an estimate

Analysis of where the risk lies with respect to the concentration of risk against a single name or group is of significant importance as is the exposure towards a single country, region, industry or economic sector

Concentration risk denotes the overall spread of a firm's outstanding accounts over the number or variety of debtors to whom the firm has credit risk.

Many of the applications for measuring credit risk depend upon the use of models. Models are only as good as the data that is fed into them and the assumptions upon which the models themselves are based. There is therefore an innate limitation in this and indeed a source of risk – model risk itself is presented.

Credit ratings are limited and the quality of credit ratings are only really as good as the date they were published and the data and opinion upon which they were based at the date they were published. Owing to limited resources they must review them regularly but not at all times. So therefore there is an innate inability to have a real time measure here.

One limitation concerns the application of limits themselves; If a risk is difficult to measure it may be hard to quantify that and a numerical limit may in fact be meaningless.

Modern risk management now takes place from an integrated approach to enterprise risk management that reflects the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated.

Banks manage the risks of asset liability mismatch by matching the assets and liabilities according to the maturity pattern or matching the duration, by hedging and by securitisation.

Asset liability management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates.

Changes in interest rates can significantly alter a bank’s net interest income (or NII), depending on the extent of the mismatch between the asset and liability interest rate reset times. Changes in interest rates also affect the market value of a bank’s equity

Methods of managing interest rate risk first require a bank to specify goals for either the book value or the market value of NII. In the case of the former, the focus will be on the current value of NII and in the latter, the focus will be on the market value of equity. In either case, though, the bank has to measure the risk exposure and formulate strategies to minimise or mitigate risk.

A model that is commonly adopted for asset and liability management measures the extent and the direction of mismatches between assets and liabilities through different maturities. It identifies the maturity gaps where these mismatches occur. A gap of zero is the optimum outcome

Correlation is a measure of how the movement of one instrument impacts another.

Diversification is most effective when the investments combined are negatively correlated.

The bid price represents the maximum price that a buyer is willing to pay for a security. The ask price represents the minimum price that a seller is willing to receive.