Step-In Risk: Implicit Support and the Breakdown of Legal Boundaries Under Stress

Why It Matters

Traditional risk metrics often fail to capture step-in risk because:

• Legal boundaries are assumed binding under all conditions
• Historical loss data excludes implicit support events
• Capital frameworks focus on contractual exposures

Step-in risk therefore represents a governance and contingent-liability problem rather than a simple modelling deficiency.

Open Questions

• How should institutions identify step-in risk ex ante without overestimating support expectations?
• Should step-in risk be reflected in capital, liquidity, or risk appetite frameworks?
• How can governance structures credibly enforce non-support commitments under stress?

Sources

• Basel Committee on Banking Supervision (BCBS). Guidelines on the identification and management of step-in risk, 2017.
• Basel Committee on Banking Supervision (BCBS). Supervisory framework for measuring and controlling large exposures.
• Financial Stability Board (FSB). Shadow Banking: Strengthening Oversight and Regulation.
• Bank for International Settlements (BIS). Implicit guarantees and financial stability.