Luxembourg's financial regulator, the Commission de Surveillance du Secteur Financier (CSSF) , has confirmed that the Basel Committee on Banking Supervision (BCBS) last week launched a public consultation on the “Identification and measurement of step-in risk”.
The objective of the proposals included in the consultative document is to mitigate potential spillover effects from the shadow banking system to banks. The BCBS’ work falls within the G20 initiative to strengthen the oversight and regulation of the shadow banking system and mitigate the associated potential systemic risks.
Step-in risk refers to the risk that a bank will provide financial support to an entity beyond, or in the absence of, its contractual obligations should the entity experience financial stress. The proposals would form the basis of an approach for identifying, assessing and addressing step-in risk potentially embedded in banks' relationships with shadow banking entities (although without limiting the proposals to specific entities).
To capture and address such risk, the focus is on the identification of unconsolidated entities to which a bank may nevertheless provide financial support, in order to protect itself from any adverse reputational risk stemming from its connection to the entities. The proposals also include potential approaches that could be used to reflect step-in risk in prudential measures. Further consideration is being given to how the proposals should be incorporated into the regulatory framework and their potential impact.
The consultation will be open until 17 March 2016.
