Assessment of inherent CSRBB
Through the assessment of the inherent level of CSRBB, competent authorities should understand the main drivers of the institution’s CSRBB exposure and evaluate the potential prudential impact of this risk on the institution.
To determine the scope of the CSRBB assessment, competent authorities should first identify the sources of CSRBB to which the institution is or might be exposed and if there have been any significant changes. As part of this, competent authorities should have regard to the institution’s governance of credit spread risk, including its CSRBB strategy and its risk appetite in relation to CSRBB, and the treatment of CSRBB within the ICAAP context.
Competent authorities should form a clear view on how changes in credit spreads can have an adverse impact on an institution’s net interest income (and, where relevant, its earnings) and economic value to gain both a short-term and a longer-term view on the possible threat to capital adequacy. For this purpose, competent authorities should consider the approach applied by the institution to form this clear view on the structure and features of the institution’s assets, liabilities, and off-balance-sheet exposures, and how these are driving the level and direction of CSRBB.
When analysing the impact on the institution’s earnings, competent authorities should consider the impact of credit spread-sensitive positions on the institution’s return, the impact of the changes in credit spreads on the institution’s net interest income, and the effects of changes in the market value of instruments – depending on account treatment – either shown in the profit and loss (P&L) account or directly in equity (e.g. via other comprehensive income).
Competent authorities should consider the results of the institution’s methodologies for measuring CSRBB, where appropriate. Through the analysis of these methodologies, competent authorities should gain a deeper understanding of the main risk factors underlying the institution’s CSRBB profile.