GS Paper 3
Syllabus: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development
Source: IE
Context: Recent banking crisis in the US has raised the question of how secure Indian banks are in the age of start-ups and digitisation.
Background:
- Despite the recent bank failures in the US (SVB), which occurred more than a decade and a half after the 2008 global financial crisis, Indian banks remained unaffected.
- India has established Domestic Systemically Important Banks (D-SIBs)/Too-Big-To-Fail banks to protect itself from 2008/SVB-like episodes.
Too-Big-To-Fail banks:
| What are D-SIBs? | How are they selected? | Significance |
| ● A bank that might substantially disrupt the financial system (because of its size, lack of substitutability, and interconnectedness) in the event of its failure.
● In 2010, the Switzerland-based Financial Stability Board (FSB) recommended that all member countries should put in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions. ● The D-SIB framework was announced by the Reserve Bank of India (RBI) in 2014. ● RBI has classified SBI, ICICI Bank and HDFC Bank as D-SIBs. ● These banks have to earmark additional capital and provisions to safeguard their operations. ● This avoids moral hazard due to the perception that government support at times of distress encourages risk-taking, reduces market discipline, etc. |
● The RBI follows a two-step process.
● First, a sample of banks to be assessed for their systemic importance is decided. ○ Banks (based on Basel-III Leverage Ratio Exposure Measure) having a size beyond 2% of GDP will be selected in the sample. ● Next, the D-SIBs are segregated into buckets based on their systemic importance scores.
G-SIBs: ● The Basel accord, in consultation with the Basel Committee on Banking Supervision (BCBS), has identified a list of G-SIBs. ● There are 30 G-SIBs currently (none from India). ● Including JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, etc.
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● The failure of a large bank anywhere can have a contagion effect around the world.
● The failure of a bank → damages confidence in the banking system → affects the domestic/global economy due to the interconnected financial systems. ● As a result, government action was seen as being necessary for many jurisdictions to guarantee financial stability. |
How is Indian banking unique?
- Sound regulatory practices and government interventions when banks have faced difficulties (Yes Bank).
- Different balance sheet structures – household savings constitute a major part of bank deposits in India, which can’t be withdrawn in bulk quantities.
- A large chunk of Indian deposits is with public sector banks, and with very strong private sectors lenders such as HDFC Bank, ICICI Bank and Axis Bank.
Way ahead:
- The RBI’s guidelines of 2018 advising banks to create an Investment Fluctuation Reserve is just the kind of countercyclical tool that has relatively insulated Indian lenders from interest rate risks.
- Still, the RBI must remain on guard to ensure neither global contagion nor management missteps threaten any local lender.
