BCBS – Issued an executive summary paper on step-in risk

August 26, 2021Summary: Step-in risk arises when a bank considers it may suffer negative impact from weakness or failure of an unconsolidated entity and concludes it must step-in to provide support. To help banks and supervisors deal with step-in risk, the BCBS guidelines do provide a method for identifying and dealing with it. They also describe potential risk measurement and management tools that banks and supervisors can use to improve existing prudential tools, informing, or adding to them. The guidelines do not prescribe any automatic Pillar 1 capital or liquidity charges but rely solely on the application of existing prudential measures in the Basel Framework. Under guidelines, banks should establish policies and procedures to identify and assess step-in risk, as part of risk management, then self-assess and report to supervisors. Where significant risk is identified, banks are required to choose appropriate response, while supervisors should then review and challenge bank assessments and responses.

Banks’ Self-assessment: This process consists of five stages, starting with defining scope of all entities to be evaluated for potential step-in risk, considering the relationship with the bank. Second, a bank may exclude some entities from the assessment that are seen to be immaterial or subject to collective rebuttals and where positions would not deteriorate. Third, the bank must then assess all remaining entities against a list of step-in risk indicators that are focused on the purpose, design and operation of all those entities. Fourth, for entities where step-in risk is identified, a bank should use the appropriate method to estimate potential impact on liquidity and capital position, to measure risk. Finally, a bank should report the results of its self-assessment to its supervisor, either as part of an existing supervisory process or in form of standalone step-in risk report.

Supervisor Response: If assessment reveals significant residual step-in risks have not been appropriately estimated or mitigated, the supervisor should decide on any additional responses. Measures supervisors may consider include a re-assessment and application of ex post punitive capital charges, if a bank supports an entity beyond contractual obligations.

For more information, visit www.bis.org.

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