The Basel Committee on Banking Supervision (Basel Committee) has published guidelines concerning the identification and management of step-in risk.

By publishing these guidelines, the Basel Committee aims to mitigate potential spill-over effects from the shadow banking system to banks. This work is part of the G20 initiative to strengthen the oversight and regulation of the shadow banking system to mitigate systemic risks, in particular risks arising due to banks’ interactions with shadow banking entities.

The guidelines are intended to act as a safety net for the situation where step-in risk may remain, emerge or re-emerge. In developing these guidelines, the Basel Committee has pursued a number of objectives, seeking to combine simplicity of the guidelines with sensitivity to residual step-in risk (i.e. step-in risk after consideration of risk mitigants). The guidelines aim for consistency across jurisdictions but, at the same time, acknowledge the idiosyncratic nature of step-in risk. They therefore allow for banks’ one-off assessments of each case and for the supervisory evaluation of such assessments.

The Basel Committee states that the guidelines 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; and
  • 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.

View Identification and management of step-in risk, 25 October 2017