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 proposed conceptual framework aims at identifying unconsolidated entities that could entail significant step-in risk through an assessment comprising the application of primary and secondary indicators (when necessary) and different approaches that could be used to reflect the step-in risk in banks’ prudential measures.
- Moreover, there may be regulations that have addressed step-in risk locally. Therefore, the BCBS has considered the specific cases of joint ventures, asset managers and assets under management where collective rebuttals could come into play to rebut the presumptions regarding indicators.
- The proposals are preliminary and the BCBS has yet to decide how the proposals will fall within the regulatory framework, including whether they fall within Pillar 1 and/or Pillar 2.
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.
Executive summary
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:
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Unconsolidated entities and other non-bank financial entities which are supported by banks beyond or in the absence of any contractual obligation.
Main content:
- Identification of step-in risk.
- Primary indicators.
- Secondary indicators.
- Measurement of step-in risk, including: three approaches for measuring step-in risk; mapping of indicators with approaches.
- Other issues and consideration for specific cases.
Download the technical note by clicking here