Why in news?
The Reserve Bank of India has recently stated that the banks namely State Bank of India, ICICI and HDFC Bank are domestic systematically important banks or banks that are too big to fail.
What are Systematically Important banks?
- Banks that cross-jurisdictional activities and complexities and do not have any substitute or replacement are called systematically important banks.
- These banks are considered too big to fail which creates an expectation from these banks at the time of recessive economical conditions.
- These are subjected to various policies and measures to protect them from systemic risks and moral hazards posed by banks.
Take a look at the domestically important bank list details below.
| Bucket | Banks | Additional Common Equity Tier 1 requirement as a percentage of Risk-Weighted Assets (RWAs) for FY 2018-19 | Additional Common Equity Tier 1 requirement applicable from April 1, 2019 (as per phase-in arrangement) |
| 5 | - | 0.0075 | 0.01 |
| 4 | - | 0.006 | 0.008 |
| 3 | State Bank of India | 0.0045 | 0.006 |
| 2 | - | 0.003 | 0.004 |
| 1 | ICICI Bank, HDFC Bank | 0.0015 | 0.002 |
How did it happen?
- Global systematically important banks were formed in 2011. The financial stability board, FSB consulted with the Basel Committee on Banking Supervision, BCBS and national authorities for their formation.
- BCBS published the methodology for assessing and identifying various G-SIBs.The BCBS is the standard-setter for banking regulations nad RBI is a part of the committee.
- The financial stability board in consultation with the International Association of Insurance Supervisors and national authorities identified te Global Systematically Important Insurers. This happened in 2013.
- It was in 20212 that the BCBS finalized its framework for dealing with the D-SIB in 2014. The D-SIB framework requires the RBI to disclose the names of the banks that are to be designated as D-SIBs. From 2015 the banks were placed in various buckets based on their credit scores called systematic importance scores.
- The RBI issued the framework for managing D-SIB in 2014. The framework requires the RBI to inform about the names of the banks it has chosen as DSIBs.
Basis on which D-SIBs are formed:
a. The banks are chosen based on the following indicators:
- Size of the bank
- Inter-connectedness
- Substitution level
- Complexity
b.Banks are then placed into four buckets based on their scores.
The additional common equity requirement for different buckets over the four-year phase-in period is as under:
| Bucket | 2016 | 2017 | 2018 | 2019 |
| 5 | 0.25% | 0.50% | 0.75% | 1.00% |
| 4 | 0.20% | 0.40% | 0.60% | 0.80% |
| 3 | 0.15% | 0.30% | 0.45% | 0.60% |
| 2 | 0.10% | 0.20% | 0.30% | 0.40% |
| 1 | 0.05% | 0.10% | 0.15% | 0.20% |
c. They must also have an additional Common Equity Tier 1 Capital (CET1) requirements ranging from 0.20% to 0.80% of risk-weighted assets (RWA)
Domestic Systematically Important Insurers
The Insurance Regulatory and Development Authority of India (IRDAI) has identified Life Insurance Corporation of India (LIC), General Insurance Corporation of India and New India Assurance Company as Domestic Systemically Important Insurers (D-SIIs) for 2020-21.
These are the insurers of bigger size and market importance with global interconnectedness whose distress can cause a dislocation in the domestic or financial system.
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