During the financial crisis, banks preferred to support certain shadow banking entities in financial distress, rather than allowing them to fail and facing a loss of reputation, even though they had neither ownership interests in such entities nor any contractual obligations to support them.
In this regard, the BCBS has published a consultative document that could form the basis of an approach for identifying, assessing and addressing step-in risk, which is defined as the risk that banks would provide financial support to certain shadow banking entities or other non-bank financial entities in times of market stress, beyond or in the absence of any contractual obligations to do so.
The technical note prepared by Management Solutions’ R&D department analyzes and summarizes the conceptual framework proposed by the BCBS to address the step-in risks arising from the relationship between banks and shadow banking entities.
The framework includes the steps to be followed in order to identify step-in risk, three approaches for measuring step-in risk and other considerations regarding joint ventures and asset managers.
Scope of application:
Unconsolidated entities and other non-bank financial entities which are supported by banks beyond or in the absence of any contractual obligation.
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