- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Domestic systemically important bank
What to study?
For Prelims and Mains: D- SIB- meaning, concerns, need and management.
Context: RBI categorises IDBI Bank as Private Sector Bank; SBI, ICICI and HDFC remain Systemically Important Banks.
What is a domestic systemically important bank and why is it important?
D-SIB means that the bank is too big to fail. According to the RBI, some banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. Banks whose assets exceed 2% of GDP are considered part of this group.
- Should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.
- The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks. Due to this perception, these banks enjoy certain advantages in funding. It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.
- RBI has to disclose names of banks designated as D-SIB. It classifies the banks under five buckets depending on order of importance.
- Based on the bucket in which a D-SIB is, an additional common equity requirement applies. Banks in bucket one need to maintain a 0.15% incremental tier-I capital from April 2018. Banks in bucket three have to maintain an additional 0.45%.
- All the banks under D-SIB are required to maintain higher share of risk-weighted assets as tier-I equity.
- It was observed during the global financial crisis that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy.
- Government intervention was considered necessary to ensure financial stability in many jurisdictions. Cost of public sector intervention and consequential increase in moral hazard required that future regulatory policies should aim at reducing the probability of failure of SIBs and the impact of the failure of these banks.
Sources: the hindu.
Mains Question: What prompted RBI to classify some banks in India such as SBI and ICICI as systemically important? Also examine implications of this move.