October 25, 2017

BCBS issued the final guidelines on identification and management of step-in risk. The guidelines aim to mitigate significant step-in risk through a supervisory process built on reporting. The guidelines are expected to be implemented in member jurisdictions by 2020.

Banks will be required to assess their step-in risk based on a wide range of indicators and a self-defined, but transparent, materiality policy. 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 step-in risk guidelines build on two consultation processes of BCBS, which were conducted in December 2015 and March 2017.

Step-in risk refers to the risk that a bank provides financial support to an entity beyond, or in the absence of, its contractual obligations, should the entity experience financial stress. As part of the G20 initiative to strengthen the oversight and regulation of the shadow banking system, the guidelines help mitigate the risk that potential distress faced by shadow banking entities spills over to banks.

 

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Keywords: International, Banking, Step-In Risk, Shadow Banking, BCBS

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