The aim of the proposed framework included in the second consultative document Identification and management of step-in risk is to mitigate potential spillover effects from the shadow banking system to banks. This work falls within the G20’s initiative to strengthen the oversight and regulation of the shadow banking system and mitigate the associated potential systemic risks.
The proposed guidelines define the step-in risk that is potentially embedded in banks’ relationships with unconsolidated entities. Step-in risk is the risk that a bank might support entities beyond its contractual obligations in order to protect itself from any adverse reputational risk stemming from its connection to the entities. If not appropriately anticipated, the materialisation of step-in risk could affect a bank’s capital and liquidity positions.
The guidelines propose criteria for identification of step-in risk that cover the risk characteristics of the entities in addition to banks’ relationships with them. In terms of prudential response, the Committee has recognised the necessity of a tailored rather than a standardised approach. To this end, this framework entails no automatic Pillar 1 capital or liquidity charge additional to the existing Basel standards. Rather, the framework leverages existing prudential tools by informing or supplementing them.
The Committee welcomes comments on the proposals by Monday 15 May 2017 using the following link: www.bis.org/bcbs/commentupload.htm. All comments will be published on the Bank for International Settlements website unless a respondent specifically requests confidential treatment.