Identification and management of step-in risk
As part of the G20's initiative to strengthen the oversight and regulation of the shadow banking system, the Basel Committee on Banking Supervision's Guidelines on identification and management of step-in risk aim to mitigate the systemic risks stemming from potential financial distress in shadow banking entities spilling over to banks.
The guidelines build upon two public consultations carried out by the Committee in December 2015 and March 2017. They introduce a flexible and tailored approach, where measures to mitigate significant step-in risk rely on a supervisory process that is supported by proportionate reporting. In particular:
- Banks define the scope of entities to be evaluated for potential step-in risk, based on the relationship of these entities with the bank
- Banks identify entities that are immaterial or subject to collective rebuttals and exclude them from the initial set of entities to be evaluated
- Banks assess all remaining entities against the step-in risk indicators provided in the guidelines, including potential mitigants
- For entities where step-in risk is identified, banks estimate the potential impact on liquidity and capital positions and determine the appropriate internal risk management action
- Banks report their self-assessment of step-in risk to their supervisor
- After reviewing the bank's self-assessment analysis, where necessary supported by an analysis of the bank's policies and procedures, the supervisor should decide whether there is a need for an additional supervisory response. To that extent, the guidelines do not prescribe any automatic Pillar 1 liquidity or capital charge, but rather rely on the application of existing prudential measures available to mitigate significant step-in risk.
The guidelines are expected to be implemented in member jurisdictions by 2020.
The Committee thanks all those who contributed time and effort to express their views during the consultation process.