On December 17, 2015, the Basel Committee launched a consultation on the identification, assessment and measurement of step-in risk. The proposed framework would form the basis for identifying, assessing and addressing step-in risk that is potentially embedded in banks’ relationships with shadow banking entities. 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 proposals only apply to unconsolidated entities (i.e. entities that are outside of the regulatory scope of consolidation). The proposed framework includes descriptions of the relationships and indicators that characterize such relationships between banks and shadow banking entities, such as capital ties, sponsorship, provision of financial facilities, decision-making and operational links. The Basel Committee proposes that any step-in risk that is identified could be addressed through prudential measures, such as through quantitative requirements or by bringing the relevant entity within regulatory consolidation. The consultation closes on March 17, 2016.

The consultation paper is available at: http://www.bis.org/bcbs/publ/d349.pdf.