DOMESTIC SYSTEMICALLY IMPORTANT BANKS:
ECONOMY
News: Domestic
Systemically Important Banks: Why are these banks ‘too big to fail’?
WHAT’S IN THE NEWS?
The RBI
retained SBI, HDFC Bank, and ICICI Bank as Domestic Systemically Important
Banks (D-SIBs) for 2024, requiring them to hold additional capital to manage
risks due to their critical role in the financial system. This designation
reflects their "Too Big to Fail" status, aimed at enhancing stability
and reducing systemic risk in India's banking sector.
Domestic
Systemically Important Banks (D-SIBs) in India
Current D-SIBs:
- The Reserve Bank of India (RBI) has retained
State Bank of India (SBI), HDFC Bank, and ICICI Bank as D-SIBs for 2024
under the same bucketing structure as in 2023.
- SBI was designated as a D-SIB in 2015, ICICI
in 2016, and HDFC in 2017.
Why D-SIBs are Important:
- D-SIBs are banks “Too Big to Fail” due to
their large size, complexity, and interconnectedness in the financial
system.
- Their continuous functioning is critical to
maintaining essential banking services for the economy.
RBI's D-SIB Framework:
- RBI issued the D-SIB framework in July 2014
and has disclosed the list of D-SIBs annually since 2015.
- The framework categorizes banks based on their
systemic importance and assigns them into different buckets.
Bucket Classification for D-SIBs:
- Banks are scored on systemic importance and
placed in five buckets.
- SBI is in Bucket 4, HDFC Bank in Bucket 3, and
ICICI Bank in Bucket 1.
Capital Requirements Based on
Buckets:
- Additional
Common Equity Tier 1 (CET1) requirements are based on the bucket
placement:
- SBI:
0.80% of Risk-Weighted Assets (RWAs) (0.60% until March 31, 2025).
- HDFC
Bank: 0.40% (0.20% until March 31, 2025).
- ICICI
Bank: 0.20%.
- Capital
surcharge requirements will increase for SBI and HDFC Bank from April 1,
2025.
D-SIB Selection Process:
- Banks with a size over 2% of GDP are evaluated
based on size, cross-jurisdictional activities, complexity, and
interconnectedness.
- A composite score is calculated, and banks
above the threshold are classified as D-SIBs and placed into buckets with
corresponding capital requirements.
Global Systemically Important Banks
(G-SIBs):
- The Financial Stability Board (FSB), with the
Basel Committee on Banking Supervision (BCBS), identifies G-SIBs annually.
- The 2023 list includes 29 G-SIBs like JP
Morgan Chase, Bank of America, Citigroup, HSBC, and BNP Paribas.
- Foreign banks designated as G-SIBs operating
in India must maintain CET1 capital in India based on their RWAs in India.
Challenges of D-SIBs:
·
Moral Hazard: The perception of government
support may encourage risky behavior.
·
Competitive Distortion: Smaller
banks may find it harder to compete.
·
Increased Costs: Higher capital requirements
could impact D-SIBs' profitability.