4.5 Identification and assessment of CSRBB

CSRBB captures a combination of two elements:

• (a) The chang es of the “market credit spread” or “market price of credit risk” ( distinct from the idiosyncratic credit spread)¹⁴ representing the credit risk premium required by market participants for a given credit quality;¹⁵
• (b) The changes of the “market liquidity spread” representing the liquidity premium that sparks market appetite for investments and presence of willing buyers and sellers;

¹⁴ Idiosyncratic credit spread reflects the specific credit risk associated with the credit quality of the individual borrower (which will also reflect assessments of risks arising from the sector and geographical location of the borrower) and the specifics of the credit instrument (e.g., whether a bond or a derivative).

¹⁵ For instance, the additional yield that a debt instrument issued by an AA-rated entity must produce over a risk-free alternative.

CSRBB does not include the effect of credit quality changes during the observation period (i.e., rating category downgrade/upgrade of a specific counterparty or instrument, considered as migration risk). In particular, the deterioration of an i nstitution’s credit quality should not have any positive impact on the credit spread risk measure. Institutions should avoid any overlap with the credit valuation adjustment risk management framework when assessing the CSRBB.

CSRBB excludes non-performing exposures.

When assessing changes in credit risk premium and liquidity premium movements, institutions can consider currency specific dimensions (i.e., EUR, USD, etc.) as a relevant dimension for market credit spread and market liquidity spread.

Institutions should not exclude any instrument in the banking book from the perimeter of CSRBB ex ante, including assets, liabilities, derivatives and other off-balance sheet items such as loan commitments, irrespective of their accounting treatment. Any potential exclusion of instruments from the relevant perimeter should be done in the case of the absence of sensitivity to credit spread risk and should be appropriately documented and justified. In any case, institutions should not exclude assets accounted at fair value.

Without prejudice to paragraph 12, small trading book business, as defined by paragraph 1 of Article 94 of Regulation (EU) No 575/2013, shall be included unless its credit spread risk is captured in another risk measure.

4.5.2 CSRBB governance and strategy

The CSRBB strategy of the institution, including the risk appetite for CSRBB should be part of the overall strategy, in particular the strategic objectives and risk objectives, which the management body must approve as laid down in subparagraph (2), letter (a) of Article 88(1) of Directive 2013/36/EU.

The institution’s risk appetite for CSRBB should be expressed in terms of the impact of fluctuating credit spreads on the different CSRBB measures. Institutions significantly exposed to CSRBB should reflect this appropriately within their risk appetite.

Institutions should ensure that procedures to identify, measure and monitor CSRBB have been established when proposing new products or activities. It should be ensured that the CSRBB characteristics of these new products and activities are well understood.

Consolidating institutions should ensure that internal governance arrangements and processes for the management of CSRBB are consistent and well-integrated on a consolidated and a sub-consolidated basis.

4.5.3 CSRBB risk assessment framework and responsibilities

In view of having internal governance arrangements pursuant to Article 74 and 88 of Directive 2013/36/EU, institutions should, in relation to CSRBB, ensure the following:

• (a) That their management body bears the ultimate responsibility for the oversight of the CSRBB management framework and the institution’s risk appetite framework to adequately cover the risks. The management body may, however, delegate the monitoring and management of CSRBB to senior management, expert individuals or an asset and liability management committee under the conditions further specified in paragraph 132.
• (b) That they have in place a CSRBB management framework that establishes clear lines of responsibilities and that consists of policies, processes and internal controls including regular independent reviews and evaluations of the effectiveness of the framework.
• (c) That the arrangements, processes and mechanisms referred for the assessment of CSRBB are comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and the institution's activities.

The management body or its delegates should, in particular, be responsible for the following:

• (a) Understanding the nature and the level of the CSRBB exposure. The management body should ensure that there is clear guidance regarding the risk appetite for CSRBB in respect of the institution’s business strategies.
• (b) Establishing that the appropriate actions are taken to assess and monitor CSRBB, consistent with the approved strategies and policies. In this regard, the management body or its delegates are responsible for setting:
• i. Systems and standards for monitoring CSRBB, valuing positions and assessing performance, including procedures for updating shock, parameters and stress scenarios and key underlying assumptions driving the institution’s CSRBB analysis;
• ii. A comprehensive CSRBB reporting and review process; and
• iii. Effective internal controls and management information systems (MISs).
• (c) Approving major CSRBB risk-taking initiatives in advance of implementation. Positions related to internal risk transfers between the non-trading book and the trading book should be properly documented.
• (d) Carrying out the oversight of the approval, implementation and review of CSRBB management policies and procedures. The level of and changes in the institution’s CSRBB exposure should be provided regularly to the management body.
• (e) Ensuring that the validation of CSRBB measurement methods and assessment of corresponding model risk are included in a formal policy process that should be reviewed and approved by the management body or its delegates.
• (f) Understanding and assessing the functioning of its delegates in monitoring and controlling CSRBB, consistent with policies approved by the management body, on the basis of regular reviews of timely and sufficiently detailed information.
• (g) Understanding the implications of the institution’s CSRBB strategies and their potential linkages with market, liquidity, credit and operational risk but without requiring all the management body members to be experts in the area. Some of the members should have sufficient technical knowledge to question and challenge the reports made to the management body. The institution should establish that management body members are responsible for ensuring that senior management has the competence to understand CSRBB and that CSRBB management are provided with adequate resources.

Institutions should have delegation arrangements and procedures in place for any delegation by the management body of the assessment and monitoring of CSRBB, including, but not limited to, the following:

• (a) Persons or committees to which tasks of the management body are delegated for developing CSRBB policies and practices, such as senior management, expert individuals or an ALCO, should be identified and have objectives clearly set out by the management body;
• (b) The management body should ensure that there is an adequate separation of responsibilities in the risk management process. The CSRBB identification, assessment, monitoring and control functions should have clearly defined responsibilities, should be independent from risk-taking functions on CSRBB and should report CSRBB exposures directly to the management body or its delegates;
• (c) The institution should ensure that the management body’s delegates have clear lines of authority over the units responsible for risk taking on CSRBB. The communication channel to convey the delegates’ directives to t hese line units should be clear; and
• (d) The management body should establish that the institution’s structure enables its delegates to carry out their responsibilities, and facilitates effective decision-making and governance. In this regard, an ALCO, or its equivalent, should meet regularly and its composition should reflect each major department linked to CSRBB. The management body should foster discussion regarding the CSRBB management process, both between its members and its delegates and between its delegates and others in the institution. The management body should also ensure that regular communication between the risk management and strategic planning areas facilitate the monitoring of the risk arising from future business.

4.5.4 CSRBB risk policies, processes and controls

Risk policies and processes

Internal controls

CSRBB IT system and data quality

Internal reporting

Model governance