Final guidelines on the identification and management of step-in risk issued by the Basel Committee

The Basel Committee on Banking Supervision has released its Guidelines on identification and management of step-in risk . The guidelines build upon two consultations carried out by the Committee 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.

The guidelines have been published as part of the G20’s initiative to strengthen the oversight and regulation of the shadow banking system; and aims to mitigate the systemic risks arising from potential financial distress in shadow banking entities spilling over to banks.

The guidelines propose to mitigate significant step-in risk through a supervisory process built on reporting. 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 rely on the application of existing prudential measures available to mitigate significant step-in risk.

The Committee expects the guidelines to enter into force as soon as possible and no later than 2020.