Ambiguous credit spread risk in EBA proposals
Complaints about the draft European guidelines with regards to interest rate risk in banking book that did not define credit spread risk arose recently. Members state that they will not monitor the risk as required if proposals are not clarified. The EBA guidance on credit spread risk is not as clear as the Basel standards.
The October 31 version of EBA guidelines proposed how banks should manage their interest rate risk in the banking book. This draft will also update guidelines on IRRBB with regards to changes by the Basel Committee published in April 2016.
EBA did not clearly define credit spread risk and credit margin in its proposal. The Basel Committee defines CSRBB as any kind of asset or liability spread risk of credit-risky instruments that is not explained by IRRBB or jump-to default risk. CSRBB covers changes to the underlying credit quality could amplify the risk of increase or decreases in the price of bonds once market interest rates change.
CSRBB is only defined as " any kind of spread risk of interest rate-sensitive instruments that is not IRRBB or credit risk". Industry professionals believe that credit spread risk should be captured in market risk, not IRRBB.
One highlight from the draft guidelines is the outlier test. The outlier test will not result in immediate supervisory action, rather to identify banks interest rate exposure and flaws in their models. This test applies six prescribed interest rate shock scenarios. Banks experience a decline more than 15% in EVE are considered outliers and subject to supervisory review.
The October 31 version of EBA guidelines proposed how banks should manage their interest rate risk in the banking book. This draft will also update guidelines on IRRBB with regards to changes by the Basel Committee published in April 2016.
EBA did not clearly define credit spread risk and credit margin in its proposal. The Basel Committee defines CSRBB as any kind of asset or liability spread risk of credit-risky instruments that is not explained by IRRBB or jump-to default risk. CSRBB covers changes to the underlying credit quality could amplify the risk of increase or decreases in the price of bonds once market interest rates change.
CSRBB is only defined as " any kind of spread risk of interest rate-sensitive instruments that is not IRRBB or credit risk". Industry professionals believe that credit spread risk should be captured in market risk, not IRRBB.
One highlight from the draft guidelines is the outlier test. The outlier test will not result in immediate supervisory action, rather to identify banks interest rate exposure and flaws in their models. This test applies six prescribed interest rate shock scenarios. Banks experience a decline more than 15% in EVE are considered outliers and subject to supervisory review.
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