Definition
CSRBB (credit spread risk in the banking book) is the risk arising from changes in the market's perception of the price of credit risk, the liquidity premium and other price components of credit-risky instruments. These changes affect both the economic value of equity (EVE) and the earnings, in particular net interest income (NII), of the banking book.
CSRBB covers only the part of these changes that is explained neither by IRRBB, that is by movements in risk-free rates, nor by expected credit risk or jump-to-default risk, which are treated elsewhere.
The scope includes at a minimum instruments measured at fair value, whose value reacts directly to spreads. The EBA guidelines also require institutions to assess other asset positions and, where relevant, liabilities, when their spreads affect the institution's value or earnings.
Measurement
- Define the scope: securities, credit derivatives and, where relevant, liabilities whose cost depends on spreads.
- Calibrate upward and downward spread shocks by issuer type, rating, sector and maturity, from historical data and scenarios.
- Measure the change in economic value (ΔEVE) and the effect on net interest income under each shock.
- Break results down by issuer and category to identify concentrations.
Regulatory requirement
The EBA guidelines on IRRBB and CSRBB (EBA/GL/2022/14) require institutions to identify, assess and monitor CSRBB, with an approach proportionate to their exposures. Like IRRBB, CSRBB is a Pillar 2 risk: it is reviewed in the SREP and must be integrated into the ICAAP.
Practical challenges
- Separating spread, rate and default effects, which requires clean market data.
- Calibrating plausible shocks for illiquid or rarely quoted securities.
- Aggregating with IRRBB without double counting.
In RIALTO
This concept is covered by the CSRBB Insight Core module. The use case 'Stress simulation' shows it in practice.