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Modelling CSRBB under regulatory guidelines

Author

Listed:
  • Segal, Maxime
  • Kristjánsson, Kristján Rúnar
  • Björnsson, Björn Hrannar

Abstract

The European Banking Authority (EBA) provides limited standardization for Credit Spread Risk in the Banking Book (CSRBB), delegating its assessment to individual financial institutions. This has led to significant variation in how CSRBB guidelines are interpreted and applied across the banking sector. This study investigates how to model plausible but unlikely credit spread shocks using Principal Component Analysis (PCA), hypothesizing that systemic risk dominates fluctuations across government and corporate bonds. The model aligns with EBA requirements and provides insights to strengthen risk management frameworks.

Suggested Citation

  • Segal, Maxime & Kristjánsson, Kristján Rúnar & Björnsson, Björn Hrannar, 2025. "Modelling CSRBB under regulatory guidelines," Finance Research Letters, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:finlet:v:82:y:2025:i:c:s1544612325007603
    DOI: 10.1016/j.frl.2025.107501
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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