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Basel Committee Releases Consultative Document on Step-In Risk

The Basel Committee on Banking Supervision has issued a consultative document on the identification and management of step-in risk. "Step-in risk" is the risk that a bank decides to provide financial support to an unconsolidated entity that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support. The main reason for step-in risk might be to avoid the reputational risk that a bank might suffer were it not to provide support to an entity facing a stress situation. Indeed, as discussed above, the financial crisis provided evidence that a bank might have incentives beyond contractual obligation or equity ties to "step in" to support unconsolidated entities to which it is connected. The proposed framework should help to mitigate potential problems at shadow banks from spilling over to banks. This work is part of the G20's initiative to strengthen the oversight and regulation of the shadow banking system with the aim of mitigating systemic risks, in particular, those arising from banks' involvement with shadow banking entities. Comments are due by May 15, 2017.

Consultative Document  |   Press Release