Recital 4

(4)The Basel Committee on Banking Supervision (BCBS) has published Guidelines on the identification and management of step-in risk ⁴ which include several indicators that should be used by institutions in identifying which entities can give rise to step-in risk. According to the BCBS Guidelines, ‘step-in risk’ is the risk that an institution decides to provide financial support to an unconsolidated entity, that is not a fully or proportionately consolidated entity, that is facing stress, in the absence of, or in excess of, any contractual obligations to provide such support. Pursuant to the BCBS Guidelines, where an institution identifies that there is significant step-in risk, it needs to determine the appropriate measures based on the nature and extent of the anticipated step-in support in each case. Those measures encompass, among others, the inclusion of the entities concerned in the regulatory scope of consolidation. In line with the BCBS Guidelines, several indicators should be considered by institutions and competent authorities to conclude whether certain undertakings should be fully or proportionally consolidated pursuant to Article 18(5), Article 18(6), point (a), or Article 18(8) of Regulation (EU) No 575/2013, as applicable, taking into account the risk of step-in these undertakings may pose to an institution. Nevertheless, institutions should also consider alternative measures to address step-in risk under their risk management procedures and internal capital adequacy assessment process (ICAAP). In addition, competent authorities may consider other measures to address the potential risk posed by those undertakings under the supervisory review and evaluation processes (SREP). In the context of the large exposures framework, the European Banking Authority (EBA) has also issued guidelines on limits on exposures to shadow banking entities that carry out banking-like activities outside a regulatory framework ⁵ , which specify the methodology that should be used by institutions to set limits, as part of their internal processes, on their individual and aggregate exposures to shadow banking entities.