Banking Sector Reforms

What are Systemically Important Banks?

Note4Students

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:

  1. Global SIBs: They are identified by BCBS (BASEL Committee on Banking Supervision)
  2. 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.

 

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