Guidelines on step-in-risks | Financial Services


Step-in risks in securtisations et al. 

New guidelines

On 25 October 2017, the Basel Committee on Banking Supervision (BCBS) published its final guidelines on identification and management of step-in risk.

Step-in risks cover all risks that ensue when a bank decides to provide financial support to an unconsolidated entity without the bank being required by contract to do so. The reasons for granting this type of financial support can vary, but potential reputation risks are often likely to be the cause.

The guidelines are part of the G20 initiative on supervising and regulating shadow banking entities and aim not to replace but, where advisable, to complement new regulations already passed, e.g. in the revised securitisation framework or in the framework for the liquidity coverage ratio. As a result, they include no actual additional capital or liquidity requirements, but compel the banks to identify their step-in risks from the outset and to take precautions that they believe are adequate to cover such risks.


Individual requirements

  1. First of all, the banks are required to identify the types of companies that are not part of their group for regulatory consolidation purposes and with whom they maintain one of the following business relationships:
      - Sponsor, i. e. the bank supports the company in different ways (e.g. in     terms of management, or placing securities on the capital market or by     providing cash and/or credit enhancements.
      - Debt or equity investor, except for loans to operating companies as part     of a standard corporate banking transaction.
      - Other contractual and non-contractual involvement that could lead to     exposing the bank to risks that are similar to those of an equity capital     investor.

    Annex 2 includes a list of particular corporate categories that the BCBS believes should be inspected by the banks. These include securitisation vehicles and certain investment companies.
  2. When analysing potential step-in risks, banks can however disregard companies with whom the existing business relationship is insubstantial and to whom general regulations at national level already apply, as a result of which step-in risks are ruled out (these are called collective rebuttals).
  3. After identifying companies with potential step-in risks, the business relationship concerned is to be scrutinised based on certain indicators to see whether significant step-in risks exist. As regards these indicators stated in the third section of the guidelines, these are circumstances which, in the case of the business relationships stated above, can typically lead to step-in risks. Such risks are for example the ability to exert significant influence – whether by making an appropriately high equity investment or due to influence on who is appointed to the management team or on its decisions – as well as certain factors that suggest a closer relationship with a bank, such as marketing under the bank’s name or a company rating that is too high given the assets.
  4. In the case of significant existing step-in risks, the bank must carry out an analysis of the expected impact on its capital or liquidity and make adequate internal provisions to prevent risk accordingly. In section four of the guidelines, the BCBS suggests several possible options such as including the company in the bank’s consolidation group for regulatory purposes, but does however admit that it expects few cases of this in practice. Other measures are increasing capital and liquidity requirements by a conversion factor that reflects the higher risk.
  5. Last but not least, banks have to submit their self-assessment of existing step-in risks regularly to the supervisory body responsible. This submission is to be made annually and form part of an already existing reporting process or be based on two of the templates enclosed in Annex 1.


Importance to securitisation vehicles

When assessing step-in risks in securitisation vehicles, there’s the question of the interaction between already existing regulations in the CRR, the revised European securitisation framework and the changes discussed on significant risk transfer (SRT). The BCBS believes that even if the requirements of the SRT are complied with, non-contractual step-in risks can exist because the criteria for the SRT only focus on the transfer of the credit risk. In addition to the SRT regulations, the rule on implicit support (art. 248 CRR) must be taken into account and the purpose of which is to ensure the financial risk is transferred to the investors too. To disclose risks in securitisation positions, art. 449 of the CRR requires the banks to provide numerous details on the securitisation, e.g. on their role in the securitisation process, or, as stated in i., in particular as regards their role as a sponsor and on companies that are part of a securitisation as an investor and managed or advised by the bank. On balance, it remains to be seen how the guidelines, which are to implemented by 2020, are then incorporated into existing regulations.


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