From UPSC perspective, the following things are important :
Prelims level : Systemically Important Banks (SIBs)
Mains level : Too Big To Fail Banks
State Bank of India, ICICI Bank, and HDFC Bank have again been named as Domestic Systemically Important Banks (D-SIBs) by the Reserve Bank of India (RBI).
What are Systemically Important Banks (SIBs)?
- SIBs are perceived as certain big banks in the country/world. They enjoy a huge customer base and also engage in cross sector activities and are perceived as ‘Too Big to Fail (TBTF)’.
- 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 fuelled the financial downturn.
- A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic.
- As a result of their importance, the government is expected to bail out these banks in times of economic distress to prevent widespread harm.
- D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.
Types of SIBs
There are two types of SIBs:
- Global SIBs: They are identified by BCBS (BASEL Committee on Banking Supervision)
- Domestic SIBs: They are declared by Central Bank of the country
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.
- ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three, with bucket five representing the most important D-SIBs.
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).
- ICICI and HDFC on the other hand, have to maintain Additional CET1 at 0.20 percent of their RWA due to being in bucker one of D-SIBs.