Shearman & Sterling LLP | FinReg | Basel Committee Issues Final Guidelines for Identifying and Managing Step-in Risk
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  • Basel Committee Issues Final Guidelines for Identifying and Managing Step-in Risk

    The Basel Committee on Banking Supervision has published final guidelines for the identification and management of step-in risk, following consultations in December 2015 and March 2017.

    The Basel Committee refers to step-in risk as the risk that a bank may provide financial support to an entity that is under financial stress beyond or without any contractual obligations to do so, to protect itself from any adverse reputational risk that may result from its connection to the entity. The aim of the guidelines is to mitigate potential spillover effects from the shadow banking system to banks. The Basel Committee's work on developing the guidelines 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 require banks to make a self-assessment of step-in risk and to report this to supervisors. The self-assessment is made up of the following five steps: (i) define the scope of all entities to be evaluated for potential step-in risk, taking into account their relationship with the bank; (ii) identify entities that are immaterial or subject to collective rebuttals and exclude them from the initial set of entities to be evaluated; (iii) assess all remaining entities against the step-in risk indicators including potential mitigants; (iv) for entities where step-in risk is identified, use the estimation method deemed appropriate to estimate the potential impact on liquidity and capital positions – measurement of the risk – and determine the appropriate internal risk management action; and (v) report the self-assessment of step-in risk to the bank's supervisor. Supervisors should review the bank's self-assessment analysis, where necessary supported by an analysis of the bank's policies and procedures, and form a view whether there is a need for additional supervisory response.

    The Basel Committee expects the guidelines to be implemented in member jurisdictions as soon as possible and no later than 2020. The first round of self-assessments and supervisory reviews is planned to be conducted in 2020.

    View the Final Guidelines.