The Basel Committee has taken a first, tentative step to formulate capital requirements and/or other prudential measures applicable when banks may feel compelled to support aspects of their own non-traditional, “shadow” operations – i.e., when there are expectations of implicit recourse back to the bank or the potential that a bank may step in to protect third parties from loss or itself from long-term reputational damage. Basel’s effort is part of a broader global one to curtail “shadow banking,” but here Basel focuses not on entities outside the scope of bank regulation (e.g., non-bank asset managers), but rather on asset-management and other “shadow” operations within banks that are not consolidated for balance-sheet purposes and thus may pose risk to the bank if there is step-in risk or markets rely on implicit recourse. Structured products and securitizations are also covered by this consultation due to fears that crisis-era recourse would reoccur at renewed threat to bank liquidity or solvency. Before mandating a capital charge – as Basel seems inclined to do – it first needs to establish a framework for identifying and measuring this risk and one is thus laid out in this consultation. However, prudential restrictions are also discussed and those germane to sponsored funds and asset management may well be picked up by national regulators as near-term actions even as Basel considers the consultation and subsequent ones in this area.
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