Is Credit Spread Risk Modellable? Understanding CSRBB Modelling in Banks
Is Credit Spread Risk Modellable? Understanding CSRBB Modelling in Banks

Summary/Abstract: Aim: This article offers a theoretical framework for conceptualising and modelling CSRBB (Credit Spread Risk in Banking Book), linking it coherently to the regulatory architecture while maintaining flexibility for diverse banking models. Methodology: This is a theoretical exposition rather than a full empirical implementation. The simplified numerical case demonstrates how EVE losses may coexist with NII gains under spread-widening, underlining the importance of evaluating both dimensions when setting internal limits and capital buffers. Findings: As presented in this paper, CSRBB is a multi-dimensional risk, encompassing valuation (EVE) and income (NII) perspectives. The dual approach is essential because spread changes affect both the present value of future cash flows and future interest margins in potentially opposing directions. Implications: A robust theoretical framework must include all positions in the banking book ─ unless exclusion can be clearly justified. CSRBB does not operate in isolation, as spread changes often co-move with interest-rate shifts and liquidity conditions. A theoretically consistent model should therefore capture joint dynamics, possibly through multi-factor term-structure frameworks linking interest-rate and spread processes. Model coherence and integration with IRRBB are critical. Originality/value: The topic of CSRBB is relatively new in literature. From a practical standpoint, the model architecture proposed here can serve as a conceptual blueprint for banks developing or refining internal CSRBB frameworks.

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