Credit Spread Risk in the Banking Book (CSRBB)

Moorad Choudhry

34 years: Banking and Capital Markets

In this video, Moorad demystifies the credit spread risk in the Banking Book (CSRBB), a crucial factor for banks. He covers its basics, regulatory requirements, practical application, and relevance in today's banking landscape. Join us to understand how CSRBB impacts financial institutions and their risk management strategies.

Treasury Risk Management

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Credit Spread Risk in the Banking Book (CSRBB)

14 mins 14 secs

Key learning objectives:

Understand the concept of credit spread risk in the banking book and what impact it has
Outline CSRBB regulatory requirements
Understand the application of CSRBB in practice
Understand the overlap between CSRBB and other regulatory and accounting regimes

Overview:

Credit Spread Risk in the Banking Book (CSRBB) pertains to how credit spread changes influence a bank's financial instrument values, notably within its banking book for long-term assets. Instruments like bonds are sensitive to these fluctuations; for example, a wider spread might lower a bond's value. This was underscored by Silicon Valley Bank's 2023 issues from US Federal Reserve rate hikes. Banks with significant bond portfolios need to be especially vigilant of CSRBB and monitor their exposures. The Basel guidance emphasises that banks must manage both interest-rate and credit-spread risks. For banks, CSRBB chiefly impacts bond portfolios, with the EBA noting that changes in credit spread at the portfolio level should be evaluated. The practical application focuses on a bank's bond holdings, especially those under Fair Value through Other Comprehensive Income (FVOCI) rules. Yet, the inclusion criteria for CSRBB remain debated, as does its overlap with IFRS 9 accounting.

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Summary

What is CSRBB and what impact does it have?

CSRBB, or Credit Spread Risk in the Banking Book, pertains to the risk that changes in credit spreads will affect a bank's financial instruments, notably those in its banking book. Such alterations in credit spreads are driven by market perceptions, including factors like credit risk and liquidity premiums. Essentially, a bank's exposure to CSRBB can cause its financial stability to fluctuate. An uptick in the credit spread of a bond's issuer, for instance, can diminish the bond's price, leading to potential losses for the bank.

What are the CSRBB regulatory requirements?

The Basel Committee for Banking Supervision introduced CSRBB as a niche of IRRBB in 2016. Initially, the Basel Committee's BCBS 368 provided minimal guidance on CSRBB, with European Union banks adopting comprehensive definitions in 2018 (updated in 2021) by the European Banking Authority (EBA). For banks with substantive bond portfolios marked at fair value, CSRBB becomes pivotal. It represents the spread risk of credit instruments unaccounted for by IRRBB. The EBA emphasises its applicability mainly to the asset side. An essential consideration lies in the Fair Value through Other Comprehensive Income (FVOCI) book. Banks should assess the "credit spread per basis point" delta (CS01) to gauge bond value fluctuations due to credit spread shifts.

How is CSRBB applied in practice?

CSRBB chiefly influences a bank's bond portfolios. Those accounted for using FVOCI rules are especially relevant. While the theoretical application of CSRBB is comprehensive, in practice, its main impact is on banks with substantial bond holdings. But, the terrain is intricate; for instance, while the EBA emphasises that accounting treatment is not pivotal in assessing CSRBB, in actuality, a bank's bond holdings, whether in the hold-to-maturity or FVOCI book, become the frontline of CSRBB's application.

What is the overlap between CSRBB and other regulatory and accounting regimes?

The intersection between CSRBB and other regulatory and accounting practices is evident when considering its treatment under various frameworks. While the EBA focuses on CSRBB's relevance to the asset side of the balance sheet, the Swedish Riksbank believes it's applicable to both assets and liabilities. Accounting standard IFRS 9 introduces the Fair Value through Other Comprehensive Income (FVOCI) category, which captures changes in the fair value of certain debt securities. This directly relates to the CSRBB concept as bond values in the FVOCI book fluctuate due to credit spread changes. Thus, there's a complex overlap of CSRBB with regulatory directives and accounting standards like IFRS 9.

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Moorad Choudhry

Professor Moorad Choudhry is a non-executive director at two UK financial institutions, having worked in London since 1989. He has experience in wholesale capital markets, treasury, ALM, and balance sheet management. Moorad's most recent role was as divisional treasurer at the Royal Bank of Scotland. He has also worked with Europe Arab Bank, KBC Financial Products, and JP Morgan. He is the author of "The Principles of Banking," which is currently in its 2nd edition.

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