Whereas in the context of IRRBB, all interest rate sensitive instruments should be included, for CSRBB no instrument in the banking book should be excluded ex ante, except for instruments under default. This includes assets, liabilities and off-balance sheet items, regardless of their accounting treatment. Moreover, EBA adopts a pragmatic approach by stating that the exclusion of any instrument should be in the absence of sensitivity to credit spread risk. Also, EBA examined the feedback received from the 2018 Guidelines and the Quantitative Impact Study (QIS) and requires all non-trading book assets at fair value to be considered.
Contrary to IRRBB, there are no specifications on the identification, calculation and allocation of capital for the purpose of CSRBB. Thus, there are no provisions regarding the computation of the contribution of CSRBB to the internal capital assessment of the institution, and likewise, no guidelines on methodologies for capital allocation and the consideration of internal capital buffer adjustments.
The former is also in line with the governance and strategy requirements, where, despite the similarities (e.g.: in implementing procedures for the analysis of CSRBB when proposing new products) there is no clear specification for including the risk appetite for CSRBB mitigation on the overall strategy and for it to be expressed in terms of acceptable impacts/ limits. This is also reflected in CSRBB not having a dedicated chapter on risk appetite and policy limits. Conversely, the risk appetite for CSRBB should be part of the overall strategy and expressed in terms of the impact of fluctuating credit spreads on both EVE and NII.
As stated, the requirements for the risk management framework and responsibilities under CSRBB are aligned with IRRBB. The list of responsibilities of the management body are detailed because it should bear the ultimate responsibility for the oversight of the CSRBB management framework and the institution’s risk appetite framework. Analogous to previous matters, the differences are related to capital adequacy and limits setting, which are exclusively of IRRBB.
In the risk policies, processes and controls chapter, the same line of reasoning is maintained, i.e., apart from the specificities and a more expanded set of requirements for IRRBB, the striking difference is again related with the allocation of internal capital and exposure limits. However, this chapter is particularly interesting because it sheds a light on the CSRBB identification, measurement, monitoring and control processes by noting, for example, the need of procedures for updating scenarios and the need of documenting of the size and form of the spread shocks to be used.
The latter examples are listed under the risk policies and processes sub-chapter, which also includes the need for:
- the measurement approach and assumptions to be proportional,
- the assumptions to be regularly reviewed,
- the standards for the evaluation of positions and the measuring of performance to be defined,
- the lines of authority and responsibility to be defined,
- the application of the boundary between non-trading and trading book, and internal risk transfers to be documented and monitored.
Similarly, the sub-chapters dedicated to IT system and internal reporting are more differentiated and likewise, it is possible to catch a glimpse of the CSRBB assessment and monitoring process. Specifically, the systems should:
- capture credit spread data on all institution’s CSRBB exposures,
- record all transactions, considering CSRBB characteristics, and be customized to the complexity and number of those creating CSRBB,
- allow for the evaluation of the individual contribution of each transaction to the overall exposure
- provide flexibility to deal with CSRBB shocks and stress scenarios,
- compute EVE and NII-based measures of CSRBB,
- record and capture the credit spread and CSRBB characteristics of all products, respectively.
Furthermore, the reports should include:
- summaries of the institution’s aggregate CSRBB exposures in terms of EVE and NII
- the identification and explanation of the strategies and exposures that are driving the level and direction of CSRBB,
- the key modelling assumptions.
The sub-chapters concerning internal controls and model governance are similar but less concrete than the requirements for IRRBB.
Finally, the regulatory framework regarding the measurement of IRRBB is extensive. However, for CSRBB it is vague. This can be particularly noted by the regulation usually referring to “measurement of IRRBB” on one hand, and “monitoring of CSRBB” on the other. This conveys a lack of concretisation. Additionally, this is also illustrated by the absence of a limits’ system and a clear methodology.