IRRBB

Question 1

IRRBB Definition

Answer 1

Current or prospective risk to capital and earnings arising from the impact of adverse movements in interest rates on the banking book.

Sub-types:
- Gap risk: Differences in term structure of rate sensitive assets and liabilities in the banking book

• Basis risk: Risk associated with assets and liabilities in the banking book that have similar terms to repricing or maturity, but are tagged to different reference interest rates
• Option risk: Risk associated with options that are embedded in assets and liabilities in the banking book

Question 2

Definition of CSRBB

Answer 2

Any kind of spread risk related to instruments with potential credit risk that is not explained by IRRBB and by the expected credit/jump to default risk

Question 3

Types of CSRBB

Answer 3

• Market credit spread (credit risk premium): Premium embedded within the overall effective interest rate on an instrument that represents premium required by market participants given instrument’s credit quality
• Market liquidity spread (liquidity risk premium): premium embedded within overall effective interest rate on an instrument that represents the market appetite/liquidity for that instrument and the presence of willing buyers and sellers