The Basel Committee on Banking Supervision, in its 2016 Standards on Interest Rate Risk in the Banking Book, defines Credit Spread Risk in the Banking Book (CSRBB) as “any kind of asset/liability spread risk of credit-risky instruments that is not explained by IRRBB and by the expected credit/jump to default risk," stating that “CSRBB is a related risk that banks need to monitor and assess in their interest rate risk management framework.”
On the other hand, the European Banking Authority, in its 2018 Guidelines on the management of interest rate risk arising from non-trading book activities (EBA/GL/2018/02), defines CSRBB as “The risk driven by changes in the market perception about the price of credit risk, liquidity premium and potentially other components of credit-risky instruments inducing fluctuations in the price of credit risk, liquidity premium and other potential components, which is not explained by IRRBB or by expected credit/(jump-to-) default risk." In the Guidelines (§18), EBA also states that “Institutions should monitor and assess their CSRBB-affected exposures, by reference to the asset side of the non-trading book, where CSRBB is relevant for the risk profile of the institution.”
Starting on 30 June 2019, these Guidelines enter into force for EU institutions, with a transitional provision for smaller banks (SREP categories 3 and 4), allowing for further six months for appliance of paragraph 18. Waiting for more detailed instructions by the European regulator for implementation, Prometeia promoted a web-based industry survey involving ALM, Treasury, Market & Liquidity risk units from almost 50 financial institutions to understand whether and how banks are approaching the assessment of their CSRBB, and to identify best practices in preparation for compliance.
As a matter of fact, a large chunk of the banks surveyed does not have in place yet a regular process for monitoring and assessing CSRBB. Most of them, though, mean to implement it in the next years. We argue these insights can be valuable for institutions willing to address this challenge, whether in the short or medium run.