[Work in progress] Is credit spread risk modellable? Understanding CSRBB modeling in banks

Abstract

This article offers a theoretical framework for conceptualizing and modelling CSRBB, linking it coherently to the regulatory architecture while maintaining flexibility for diverse banking models. Several conclusions arise from the analysis. As presented in this paper, CSRBB is a multi-dimensional risk, encompassing both valuation (EVE) and income (NII) perspectives. The dual approach is essential because spread changes affect both the present value of future cash flows and future interest margins in potentially opposing directions. The focus of the paper is on a theoretical exposition rather than a full empirical implementation, though a stylised example illustrates key features.