Domestic Systemically Important Banks (D-SIBs)

Domestic Systemically Important Banks (D-SIBs)

Why in news :

  • RBI has classified SBI, ICICI Bank, and HDFC Bank as D-SIBs.

  • The additional Common Equity Tier 1 (CET1) requirement for D-SIBs was phased-in from April 1, 2016, and became fully effective from April 1, 2019.
  • The additional CET1 requirement was in addition to the capital conservation buffer.
  • It means that these banks have to earmark additional capital and provisions to safeguard their operations.
  • Under the D-SIB framework announced by RBI on July 22, 2014, the central bank was required, from 2015, to disclose the names of banks designated as D-SIBs, and to place them in appropriate buckets depending upon their Systemic Importance Scores (SISs).
  • Depending on the bucket in which a D-SIB is placed, an additional common equity requirement is applicable to it.
  • The Basel, Switzerland-based Financial Stability Board (FSB), an initiative of G20 nations, has identified, in consultation with the Basel Committee on Banking Supervision (BCBS) and Swiss national authorities, a list of global systemically important banks (G-SIBs).

How does RBI select D-SIBs?

  • The RBI follows a two-step process to assess the systemic importance of banks.
  • Banks are selected for computation of systemic importance based on an analysis of their size (based on Basel-III Leverage Ratio Exposure Measure) as a percentage of GDP.
  • Banks having a size beyond 2% of GDP will be selected in the sample.

Why was it felt important to create SIBs?

  • During the 2008 crisis, problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the global financial system, which negatively impacted the real economy.
  • Government intervention was considered necessary to ensure financial stability in many jurisdictions.
  • The cost of public sector intervention, and the consequential increase in moral hazard, required that future regulatory policies should aim at reducing the probability and the impact of the failure of SIBs, says the RBI.
  • In October 2010, the 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.
  • SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’, due to which these banks enjoy certain advantages in the funding markets.
  • While the Basel-III Norms prescribe a capital adequacy ratio (CAR) — the bank’s ratio of capital to risk — of 8 per cent, the RBI has been more cautious and mandated a CAR of 9 per cent for scheduled commercial banks and 12 per cent for public sector banks.

Syllabus : Prelims + Mains; GS3 – Indian Economy