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TCH Submits Comment Letter on Basel’s Step-In Risk Proposal

TCH has submitted a comment letter to the Basel Committee in response to their Identification and Measurement of Step-In Risk consultative document. Although the comment letter acknowledges that step-in risk is an appropriate focus of banks and their supervisors, it respectfully urges the Basel Committee to fundamentally reconsider the proposed approach. The framework suffers from serious flaws that render it imprecise and impractical in application, and in particular would: (i) take a one-size fits all approach to identifying step-in risks by defining broad indicators, by presuming step-in risk when an indicator is present, and incorporating ill-defined and inconsistent definitions of step-in risk; (ii) result in an inappropriate and over-inclusive approach that would have significant negative consequences for certain bank holding company activities that are important to the broader economy; and (iii) not take into account the full range of existing mechanisms and post-crisis reforms that sufficiently mitigate step-in risk in most if not all instances in the United States. The letter urges the Basel Committee to fundamentally reconsider its approach by identifying potential areas of step-in risk that national supervisors would use to compare against their own accounting standards, legislation, regulations and supervisory methods of identifying such off-balance sheet risks. Only once the actual residual risk not previously addressed is identified, should national regulators implement the portions of the international framework relevant to such residual risks.