Quantifying CSRBB Shocks using PCA
By the end of 2023, banks will need to have implemented the updated EBA IRRBB Guidelines , which includes requirements for Credit Spread Risk in the Banking Book (CSRBB).1 For most banks, measuring CSRBB and setting risk appetite for CSRBB is new. Regulatory and scientific guidance is limited. The aim of this paper is to provide a framework for modeling CSRBB shocks which can be embedded in a bank’s existing IRRBB implementation. This will provide banks with an initial methodology, which can be refined beyond 2023. This paper measures CSRBB on EUR denominated government bonds, obtained from data provider Refinitiv, using a Principal Component Analysis. For a set of government bonds with equal maturity and comparable rating, we assume that the first principal component can be interpreted as the systemic spread. Changes in the systemic spread are then interpreted as CSRBB shocks. The paper provides weekly and monthly shocks for credit spreads over the risk free rate of Euro denominated government bonds for different maturities, ranging from 1 to 20 years. It is observed that the bandwidth of a CSRBB shock varies across countries. It is also observed that bonds of higher rated countries have lower variation in the systemic spread than lower rated countries.
1 The introduction of CSRBB is the consequence of the Article 84 of the Capital Requirement Directive (CRD V) of the European Parliament and of the Council, which mandates the EBA to issue guidelines to specify the criteria for the assessment and monitoring of CSRBB.