4.6 Monitoring of CSRBB

Institutions should implement robust internal measurement systems (IMSs) that capture all components and sources of CSRBB which are relevant for the institution’s business model.

Institutions should monitor their exposure to CSRBB in terms of potential changes to the different CSRBB measures. Institutions should use complementary features of the different approaches to capture the complex nature of CSRBB over the short-term and long-term time horizons. In particular, institutions should measure and monitor (i) the overall impact of key modelling assumptions on the different CSRBB measures, and (ii) the CSRBB of their banking book derivatives where relevant for the business model.

4.6.2 Methods for monitoring CSRBB

Institutions should develop and use their own assumptions and calculation methods for the assessment of CSRBB. The choice of measurement methodology should be adequate for the complexity of the bank itself.

The limitations of each quantitative tool and model used should be fully understood by the institution, and these limitations should be taken into account in the CSRBB risk management process. In assessing CSRBB, institutions should be aware of the risks that may arise as a consequence of accounting treatment of transactions in the non-trading book.

As an exception, in the practical implementation of paragraph 120 and for proportionality reasons, institutions may include idiosyncratic credit spread components for the monitoring of CSRBB, as long as it is ensured that the measures will yield more conservative results.

4.6.3 CSRBB monitoring assumptions

When measuring CSRBB, institutions should fully understand and document key modelling assumptions. These assumptions should be aligned with business strategies and be regularly tested.

Institutions should take into account the implications of accounting practices for the measurement of CSRBB, in particular for net interest income measures plus market value changes.

If the reliability and stability of diversification assumptions are appropriately validated and documented; diversification between CSRBB and IRRBB may be possible. Under the same condition, diversification assumptions between CSRBB and other risks may be possible. The diversification effects should be estimated conservatively enough to be assumed to be sufficiently stable even in economic downturns and under market conditions that are unfavourable for the institution’s business and risk structure. In any case institutions should have separate assessments of CSRBB and other risks (including IRRBB).

As market conditions, competitive environments and strategies change over time, institutions should review significant measurement assumptions at least annually, and more frequently during rapidly changing market conditions.

For the purpose of CSRBB, institutions should set-up prudent documentation supporting their policies assumptions and procedures, and include a process for keeping them under review. Institutions should understand, for the purpose of CSRBB, the impact of the chosen CSRBB-related investment strategies.