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Domestic Systemically Important Banks (D-SIBs):

GS Paper 3:

Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Context:

Reserve Bank of India has released its list of Domestic Systemically Important Banks (D-SIBs) in 2021.

  • It has identified the state-owned lender State Bank Of India and the private lenders ICICI Bank and HDFC Bank as systemically important banks, which are perceived as banks, ‘too big to fail’.

 

What are D-SIBs?

The system of D-SIBs was adopted in the aftermath of the 2008 financial crisis where the collapse of many systematically important banks across various regions further fueled the financial downturn.

  • D-SIBs are important for the country’s economy. In events of distress, the government supports such banks and if such a bank fails, it would lead to disruption of the country’s overall economy.
  • RBI finalizes such banks after considering factors like size, complexity, lack of substitutability and interconnectedness of the banks, state reports.

 

How are D-SIBs determined?

Since 2015, the RBI has been releasing the list of all D-SIBs. They are classified into five buckets, according to their importance to the national economy.

  • In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 percent of the national GDP. The banks are then further classified on the level of their importance across the five buckets.

 

What regulations do these banks need to follow?

Due to their economic and national importance, the banks need to maintain a higher share of risk-weighted assets as tier-I equity. SBI, since it is placed in bucket three of D-SIBs, has to maintain Additional Common Equity Tier 1 (CET1) at 0.60 percent of its Risk-Weighted Assets (RWAs).

 

Need for:

  • 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.

 

Insta Curious:

Did you know that the Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS) and national authorities, has identified Global Systemically Important Banks (G-SIBs) since 2011?

Mains Link:

What prompted RBI to classify some banks in India such as SBI and ICICI as systemically important? Also examine implications of this move.

Sources: the Hindu.