Document Type

Article

Publication Date

2026

Publication Title

The North American Journal of Economics and Finance

Keywords

credit spread risk, IRRBB, CSRBB, banking book, EBA, regulation change

Abstract

This research examines the relationship between credit spread risk in the banking book (CSRBB) and bond market behavior across various maturities in twelve European nations. We address the challenges banks encounter in modeling CSRBB in isolation, as directed by the European Banking Authority’s (EBA) revised guidelines, which mandate the distinct management of CSRBB and interest rate risk in the banking book (IRRBB). Utilizing IRF and VAR models, the analysis demonstrates that credit spread shocks have divergent effects on sovereign bond I-Spreads and 5-year Credit Default Swap spreads across different tenors and countries. The results also indicate that shock absorption and transmission vary considerably between short-term and long-term bonds. Tenor sensitivity influences the structuring of risk-based capital, the development of hedging strategies, and the optimization of debt maturity. The findings question the validity of parallel shift assumptions in conventional CSRBB stress testing, indicating that term structure responses exhibit non-linearity, country dependence, and regime sensitivity. The study highlights the importance of translating IRF outputs into base, moderate, and severe shock scenarios for effective CSRBB modeling and compliance. This process allows financial institutions to improve risk mitigation strategies, ensure balance sheet resilience, and align with the EBA’s revised guidelines.

Funding Source

This article was published Open Access thanks to a transformative agreement between Milner Library and Elsevier.

Creative Commons License

Creative Commons Attribution 4.0 International License
This work is licensed under a Creative Commons Attribution 4.0 International License.

DOI

10.1016/j.najef.2026.102688

Comments

First published in The North American Journal of Economics and Finance (2026): https://doi.org/10.1016/j.najef.2026.102688

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