Credit spread risk in the banking book and the SVB case · RiskAtoms Academy

By the end you will be able to

1Define credit spread risk in the banking book as Basel and the EBA do, and tell it apart from IRRBB and credit risk.
2Measure CSRBB on a bond book with CS01 and a spread stress, and show where the loss lands in the accounts.
3Read SVB's end-2022 balance sheet: held-to-maturity and available-for-sale securities, unrealised losses and equity.
4Explain how rates, deposit behaviour and accounting combined at SVB, and what each IRRBB lens would have shown.

Why it matters

At the end of 2022 Silicon Valley Bank reported equity of $16.0bn and a common equity tier 1 ratio of 12%. In the notes to the same accounts, its held-to-maturity securities, bought for $91.3bn, were worth $76.2bn. The $15.2bn difference was 94.7% of its equity and appeared in neither its profit nor its capital. Ten weeks after the year end the bank had failed. Nothing in the bond portfolio had defaulted. Interest rates had risen, the deposits had started to cost money and to leave, and the accounting had kept the loss out of sight until the day it had to be realised.

Core explanation

Two risks that hide in the banking book

Credit spread risk in the banking book

A bank's bonds lose value when risk-free rates rise: that is IRRBB, measured in L3.6.05: Economic value of equity sensitivity. They also lose value when the market demands more yield for the same credit, a widening of the credit spread, even if no issuer is downgraded. Basel names this credit spread risk in the banking book (CSRBB) and defines it as “any kind of asset/liability spread risk of credit-risky instruments that is not explained by IRRBB and by the expected credit/jump to default risk”. Banks must monitor and assess it alongside IRRBB.

The EBA's 2022 guidelines go further. CSRBB is the risk driven by changes in “the market price for credit risk, for liquidity and for potentially other characteristics” of credit-risky instruments, not captured by IRRBB or by expected default risk, assuming the same level of creditworthiness. It has two parts: the market credit spread, the premium investors require for a given credit quality, and the market liquidity spread. Changes in an issuer's own credit quality and non-performing exposures are left out. No banking book instrument may be excluded in advance, whatever its accounting, and assets at fair value never. The CSRBB part of the guidelines applies from 31 December 2023.

Sort itIRRBB, CSRBB or credit risk?

Each line describes why a bank's bond or loan lost value. Which risk is it?

SONIA swap rates rise 100bp and every fixed-rate bond falls
Spreads on all BBB corporate bonds widen 80bp in a sell-off, with no downgrades
Covered bonds cheapen because dealers stop making prices in them
An issuer is downgraded from A to BBB and its bond falls
A corporate borrower defaults on its loan

Illustrative dataRiskAtoms Bank plc's banking book

The same £67bn balance sheet as Module 3.5, on one made-up reporting date, in pounds, with how each line reprices, its customer rate, a SONIA curve with Bank Rate at 4.00%, a £19.2bn macro hedge on the fixed-rate mortgages and a £16bn structural hedge. Tier 1 capital is taken as £3.5bn. The figures are round illustrative values, not any bank's data. Every lesson in Module 3.6 uses this book, so the figures agree.

Extra for this lesson: how each of the book's bond lines and its fixed-rate corporate loans are accounted for (FVOCI or amortised cost), and an illustrative spread stress for each. The cash flows are the book's own. The mortgages are also in scope in principle and are left out here to keep the table short.

The book holds £3,621k of CS01 across these lines: every basis point of widening costs that much value. A stress that widens gilt spreads 20bp, covered and AA bonds 50bp, BBB bonds 125bp and corporate loan spreads 75bp costs:

Line	Accounting	Balance	CS01	Stress	Loss
Gilts in the liquidity buffer	FVOCI	£5.0bn	£1,511k	+20bp	£30.1m
Gilts held to collect	Amortised cost	£2.0bn	£604k	+20bp	£12.0m
Covered and AA corporate bonds	FVOCI	£2.0bn	£580k	+50bp	£28.7m
BBB corporate bonds	FVOCI	£0.6bn	£197k	+125bp	£23.9m
Fixed-rate corporate term loans	Amortised cost	£2.0bn	£728k	+75bp	£53.7m
Total			£3,621k		£148.4m

Only the FVOCI lines show the £82.7m in the accounts, through other comprehensive income; the other £65.7m sits in lines held at amortised cost and is an economic loss only. Spreads rarely move alone. Add the parallel up rate shock of L3.6.06: The standard shock scenarios to the same lines:

Line	Accounting	Parallel up	Parallel up and spread stress
Gilts in the liquidity buffer	FVOCI	−£388.5m	−£414.7m
Gilts held to collect	Amortised cost	−£155.4m	−£165.9m
Covered and AA corporate bonds	FVOCI	−£150.2m	−£175.6m
BBB corporate bonds	FVOCI	−£50.9m	−£72.0m
Fixed-rate corporate term loans	Amortised cost	−£188.3m	−£235.8m
Total		−£933.2m	−£1,063.9m

The FVOCI lines alone lose £662.2m, 18.9% of Tier 1, and that loss reaches equity. The bank's IRRBB outlier test, run on the whole balance sheet with the deposits and hedges offsetting, does not show it, because the offsets sit in lines that are not at fair value.

Silicon Valley Bank, from the rate side

L3.5.03: What drains liquidity told the story of SVB's run: over $40bn withdrawn on 9 March 2023, failure the next day. This is the story of why the run broke the bank.

Public dataSVB Financial Group, 31 December 2021 and 2022, $m

From its Form 10-K for 2022 and the Federal Reserve's April 2023 review. Real, reported figures, not the RiskAtoms book.

	End-2021	End-2022
Held-to-maturity securities, cost	$98,202m	$91,327m
Held-to-maturity securities, fair value	$97,227m	$76,169m
Available-for-sale securities, fair value	$27,221m	$26,069m
Deposits	$189,203m	$173,109m
of which non-interest-bearing	$125,851m	$80,753m
Interest expense on deposits (year)	$62m	$862m
Net interest income (year)	$3,179m	$4,485m
Stockholders' equity	$16,236m	$16,004m
Accumulated other comprehensive income	−$9m	−$1,911m

The rates. Securities were 55% of total assets, mostly long fixed-rate agency mortgage-backed securities and Treasuries. The Fed's review gives the HTM book a weighted-average duration of 6.2 years. A 16.6% fall in value on that duration is what a rise of about 2.7% in yields does, close to the rise in long US yields since the book was bought: the 10-year Treasury yield averaged 1.47% in December 2021 and 3.62% a year later.
The accounting. $91.3bn was classed as held to maturity, at amortised cost: its $15.2bn loss did not touch equity. The $26.1bn available for sale book was at fair value; its $2.5bn loss went to AOCI, which fell from −$9m to −$1,911m. Under the US rules for a bank of its size at the time, AFS losses did not reduce regulatory capital either: the Fed estimated capital would have been $1.9bn lower had they counted.
The deposits. Deposits fell $16.1bn in 2022, and their mix changed: non-interest-bearing deposits fell $45.1bn, from 66.5% of deposits to 46.6%, as companies moved money into accounts that paid. Interest expense on deposits rose 13.9 times, from $62m to $862m. About 94% of deposits were uninsured. These were not the sticky, low-beta deposits of L3.6.09: Non-maturity deposits.
The risk management. The Fed found that SVB had breached its long-term interest rate risk limits on and off since 2017, made “counterintuitive modeling assumptions about the duration of deposits” in April 2022, and removed interest rate hedges that would have protected it against rising rates. Its NII was by then projected to fall.

TimelineHow the three combined

1 / 5

2020–21

Deposits invested long

Deposits poured in from technology companies and were invested in long fixed-rate securities, most of them classed as held to maturity, at the low yields of the time.

What each lens would have shown

The formal version

A credit-risky line's cash flows $\text{CF}_k$ are discounted at the risk-free zero curve $z$ plus a spread $s$ . CSRBB moves $s$ ; IRRBB moves $z$ ; both act on the same flows:

\begin{aligned} V(z, s) &= \sum_k \text{CF}_k\, e^{-(z(t_k) + s)\,t_k} \\ \text{CS01} &= V(z, s) - V(z, s + 0.0001) \\ &\approx D_s \times V \times 0.0001 \\ \Delta V_{\text{CSRBB}} &= V(z, s + \Delta s) - V(z, s) \\ \Delta V_{\text{both}} &= V(z + \Delta z,\, s + \Delta s) - V(z, s) \\ L_{\text{HTM}} &= \text{cost} - \text{fair value} \\ \text{Equity}_{\text{FV}} &= \text{Equity} - L_{\text{HTM}}\,(1 - \tau) \end{aligned}

$D_s$ is the spread duration and $\tau$ the tax rate. For SVB at the end of 2022, with $\tau = 25.9\%$ (its 2022 effective rate) and the duration approximation $\Delta P / P \approx -D\,\Delta y$ :

\begin{aligned} L_{\text{HTM}} &= 91{,}327 - 76{,}169 = \$15{,}158\text{m} \\ \frac{L_{\text{HTM}}}{\text{Equity}} &= \frac{15{,}158}{16{,}004} = 94.7\% \\ \text{Equity}_{\text{FV}} &= 16{,}004 - 15{,}158 \times 0.741 \\ &= \$4{,}775\text{m} \\ \Delta y &\approx \frac{15{,}158 / 91{,}327}{6.2} = 2.68\% \end{aligned}

Try it

Withdraw deposits from SVB's end-2022 balance sheet. The bank pays from cash, then sells AFS securities, then HTM securities, at their year-end fair values.

Try itRun SVB's end-2022 balance sheet

Deposits withdrawn$40bn (23% of deposits)

Accounting for HTM sales

Cash$13.8bn
AFS securities sold$26.1bn
HTM securities sold$0.1bn
Not covered$0.0bn
Withdrawn$40.0bn

Equity after, losses after tax$4.8bn

Equity after, before tax$0.8bn

Losses realised on sales (before tax)$2.56bn

HTM loss reaching equity$15.16bn

Equity reported at end-2022$16.0bn

HTM book taintedYes

Cash and the AFS book together cover about $40bn. Beyond that the bank must sell HTM securities at a loss, and once it sells them it can no longer claim it will hold the rest to maturity: the whole HTM loss comes onto the balance sheet. Losses on AFS were already in equity through other comprehensive income, so selling them moves the loss into profit without changing equity. Borrowing against the securities instead would have avoided selling, but not the loss in their value.

Worked example

From the 10-K to economic equity

Reading SVB's end-2022 accounts

Step 1 of 5

1
Reported equity
$16.0bn, already net of the AFS losses through AOCI (−$1,911m).

Back at RiskAtoms Bank

Its FVOCI bonds would lose £662.2m in parallel up with the spread stress, 18.9% of Tier 1, straight into equity. Its stable, low-beta current accounts and its hedges are what let it hold the rest, and the module has shown how much those depend on assumptions.

Regulatory lens

Basel. SRP31 asks banks to monitor and assess CSRBB as part of their IRRBB framework, with no standardised measure. Europe. The EBA's 2022 guidelines set the definition, scope and monitoring expectations above; the CSRBB part has applied since 31 December 2023. United States. The Fed's April 2023 review found weaknesses in SVB's interest rate and liquidity risk management that supervisors had identified but not forced the bank to fix, and noted that rules tailored for banks of its size had removed AFS losses from capital. The IRRBB and CSRBB rules in detail come in M4.5: Liquidity and IRRBB regulation; accounting classification under IFRS 9 in M4.7: Accounting for risk.

Spark Atoms

Spark AtomHold to maturity, until you can't

The held-to-maturity label rests on the bank's intent and ability to hold. Ability depends on funding. A bank with 94% of its deposits uninsured had the intent; on 9 March 2023 it found it did not have the ability.

Spark AtomTwice the peers

The Fed compared SVB with other large banks: securities were 55% of its assets against 25% for its peers, and 78% of its securities were held to maturity against 42%. Its reported CET1 ratio was a comfortable 12%. The ratio everyone watched was the one that looked best.

Key takeaways

CSRBB is the risk from the market's price of credit and liquidity moving, for the same credit quality; it excludes rate moves (IRRBB), migration and default.
On the book, a spread stress costs £148.4m; only £82.7m shows in equity, because the rest is at amortised cost.
With the parallel up shock as well, the FVOCI bonds lose £662m, 18.9% of Tier 1: rate and spread risk on fair-value lines reach capital directly.
SVB's HTM book was $15.2bn under water at end-2022, 95% of equity, invisible in its reported capital.
Rates, deposits and accounting combined: long assets, deposits that repriced and ran, and a label that held only while the bank did not have to sell.

Reaction

Check what stuck

Question 1 · objective 3

A bank holds £2bn of fixed-rate bonds with a modified duration of 6. Yields rise 2 percentage points. Roughly how much value do the bonds lose, in £m?

£m

Question 2 · objective 1

Which of these is credit spread risk in the banking book, as Basel and the EBA define it?

AA bond falls because its issuer defaultsBA bond falls because the issuer is downgraded two notchesCAll BBB bonds fall because investors demand more yield for BBB credit, with no change in any issuer's ratingDA bond falls because SONIA swap rates rise

Question 3 · objective 3

At the end of 2022 SVB's held-to-maturity securities cost $91,327m and were worth $76,169m. Its equity was $16,004m. What was the HTM unrealised loss as a share of equity, in %?

%

Question 4 · objective 2

A £100m bond has a spread duration of 4.5. What is its CS01, in £ thousands (the value lost for a 1bp widening)?

£k

Question 5 · objective 4

Why did SVB's held-to-maturity losses matter once deposits started to leave?

AThey did not: HTM securities are never soldBTo pay depositors beyond its cash and AFS securities the bank would have to sell HTM securities, realising losses and putting the rest of the HTM book's losses on the balance sheetCBecause the FDIC insures securitiesDBecause HTM losses are counted twice in the LCR

Glossary

CSRBB: Credit spread risk in the banking book (CSRBB): the risk from changes in the market's price for credit and liquidity on credit-risky instruments, beyond what interest rate risk and expected default risk explain.
Credit spread: Credit spread: the extra yield a bond or loan pays over the risk-free rate for the same term, as compensation for credit and liquidity risk.
CS01: CS01: the change in value for a one basis point widening of the credit spread, the spread equivalent of DV01.
FVOCI: FVOCI (fair value through other comprehensive income): securities held at market value, with changes in value going to other comprehensive income in equity rather than to profit. The US equivalent is available for sale (AFS).
Amortised cost: Amortised cost: securities or loans held at their purchase cost adjusted over time, so market value changes are not recognised. The US held-to-maturity (HTM) category is held this way.
Held to maturity (HTM): Held to maturity (HTM): a US accounting category for debt securities a bank has the intent and ability to hold to maturity; they are carried at amortised cost.
Available for sale (AFS): Available for sale (AFS): a US accounting category for debt securities carried at fair value, with unrealised gains and losses in accumulated other comprehensive income (AOCI).
AOCI: Accumulated other comprehensive income (AOCI): the part of equity that collects unrealised gains and losses not yet in profit, such as on AFS securities.
Tainting: Tainting: selling held-to-maturity securities calls into question the intent to hold the rest, which can force the whole portfolio to be reclassified at fair value.
Uninsured deposits: Uninsured deposits: balances above the deposit insurance limit, which depositors stand to lose if the bank fails.

Deep Dives & Origins

Deep Dives

Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 2023. Introductory.
European Banking Authority, Guidelines on IRRBB and CSRBB (EBA/GL/2022/14), October 2022, section 4.5 on CSRBB. Advanced.
M. Labonte, Banks' Unrealized Losses, Part 2: Comparing to SVB, Congressional Research Service Insight IN12232, September 2023. Introductory.

Origins

Basel Committee on Banking Supervision, Interest rate risk in the banking book, Standards (d368), April 2016, paragraph 10; Basel Framework SRP31.3, in force from 1 January 2026.
European Banking Authority, Guidelines on IRRBB and CSRBB, EBA/GL/2022/14, 20 October 2022, paragraphs 7 and 120 to 124.
SVB Financial Group, Form 10-K for the fiscal year ended 31 December 2022, US Securities and Exchange Commission, February 2023, and its financial statement tables.
Board of Governors of the Federal Reserve System, Review of the Federal Reserve's Supervision and Regulation of Silicon Valley Bank, April 2023.
Federal Deposit Insurance Corporation, Vice Chairman T. Hill, Remarks on recent bank failures and the path ahead, 12 April 2023.
M. Labonte, Banks' Unrealized Losses, Part 2: Comparing to SVB, CRS Insight IN12232, 1 September 2023.

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