December 18, 2015

Basel Committee Seeks to Avoid ''Spillover Effects'' from Shadow Banks to Banks

Steven Lofchie Commentary by Steven Lofchie

The Basel Committee on Banking Supervision proposed a conceptual framework with the objective of mitigating "spillover effects" from the shadow banking system to banks. For the purposes of the consultative document, step-in risk refers to the risk that a bank will provide financial support to an entity beyond or in the absence of its contractual obligations, should the entity experience financial stress. The proposals would form the basis of an approach for identifying, assessing and addressing step-in risk potentially embedded in banks' relationships with shadow banking entities.

According to the report, the committee will conduct a Quantitative Impact Study and welcomes public comment on the proposals by March 17, 2016. The publication is part of the G20 initiative "to strengthen the oversight and regulation of the shadow banking system and mitigate the associated potential systemic risks."


This is actually a report that poses good questions. It is not a generalized attack on non-banks that raise money or lend it. Rather, it is a discussion of the relationship between banks and non-bank entities with which the banks have some affiliation, such as sponsored money market funds or conduit financing vehicles.

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