The Basel Committee on Banking Supervision recently issued a consultative document on the Identification and management of step-in risk. The proposed framework will help to mitigate potential problems at shadow banks from spilling over to banks. This work is part of the G20’s initiative to strengthen the oversight and regulation of the shadow banking system with the aim of mitigating systemic risks, in particular, those arising from banks’ involvement with shadow banking entities.
The proposals follow a previous consultation issued in December 2015 and set out a framework for identifying and managing step-in risk – the risk that a bank might support unconsolidated entities, beyond any contractual obligation, in order to protect itself from any reputational damage arising from its connection to such entities. If not appropriately anticipated, the materialisation of step-in risk could erode a bank’s capital and liquidity position.
Building on the comments received during the first consultation, the Committee has expanded the identification criteria to take into account the risk characteristics of the entities involved in addition to the banks’ relationships with them. In terms of a prudential response, the Committee has adopted a tailored rather than a standardised approach. To this end, the framework entails no automatic Pillar 1 capital or liquidity charge additional to the existing Basel standards. Rather, the framework makes use of existing prudential tools by informing or supplementing them.
The revised framework is issued for a 60-day consultation period with a focus on the supervisory reporting templates and any issues that require clarification. The Committee does not envisage making significant changes to the revised framework below, which it views as near-final.
