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.