Domestic Systemically Important Banks (D-SIBs)
- December 29, 2023
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Domestic Systemically Important Banks (D-SIBs)
Subject :Economy
Section: Monetary Policy
The Reserve Bank of India (RBI) has designated State Bank of India (SBI), HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs) and has placed them in specific buckets based on their Systemic Importance Scores (SISs).
- ICICI Bank:
- ICICI Bank continues to be in the same bucketing structure as the previous year.
- State Bank of India (SBI):
- SBI has moved from bucket 3 to bucket 4.
- HDFC Bank:
- HDFC Bank has shifted from bucket 1 to bucket 2.
- Effective Date of Higher D-SIB Buffer Requirements:
- For SBI and HDFC Bank, the higher D-SIB buffer requirements resulting from the bucket increase will be effective from April 1, 2025.
- The additional Common Equity Tier 1 (CET1) requirement will be in addition to the capital conservation buffer.
- D-SIB Framework:
- The D-SIB framework requires the RBI to disclose the names of banks designated as D-SIBs and place them in appropriate buckets based on their SISs.
- Based on the bucket in which a D-SIB is placed, an additional common equity requirement is applied.
- Foreign Banks with Branch Presence in India:
- In the case of a foreign bank with a branch presence in India that is a Global Systemically Important Bank (G-SIB), it must maintain an additional CET1 capital surcharge in India, proportionate to its Risk Weighted Assets (RWAs) in India.
- Historical Designation:
- The RBI had previously designated SBI and ICICI Bank as D-SIBs in 2015 and 2016.
- Based on data collected as of March 31, 2017, HDFC Bank was also classified as a D-SIB.
- The current update is based on data collected as of March 31, 2023, and considers the increased systemic importance of HDFC Bank post the merger of erstwhile HDFC Ltd into HDFC Bank on July 1, 2023.
Domestic Systemically Important Banks (D-SIBs) in India:
The Reserve Bank of India (RBI) has identified State Bank of India (SBI), ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks (D-SIBs). This designation reflects the significance of these banks in the Indian economy, with considerations for their size, complexity, lack of substitutability, and interconnectedness.
What are D-SIBs?
D-SIBs are banks that are considered “too big to fail,” meaning their failure could have severe implications for the overall economy. The concept of D-SIBs was introduced globally in the aftermath of the 2008 financial crisis to address the risks posed by large and interconnected banks.
Determination of D-SIBs:
- Factors Considered: The RBI determines D-SIBs based on factors such as size, complexity, lack of substitutability, and interconnectedness with the financial system.
- Classification into Buckets: D-SIBs are classified into five buckets based on their importance to the national economy.
- Asset Threshold: To be designated as a D-SIB, a bank must have assets exceeding 2 percent of the national GDP.
- Regulatory Requirements: D-SIBs are subject to higher regulatory requirements. They need to maintain a higher share of risk-weighted assets as tier-I equity.
Regulatory Requirements for D-SIBs:
- Additional Capital: D-SIBs are required to maintain Additional Common Equity Tier 1 (CET1) capital based on their risk-weighted assets.
- Risk Mitigation: These requirements aim to mitigate the risks associated with the failure of a D-SIB and ensure their ability to absorb losses.
Significance:
- Economic Importance: D-SIBs play a crucial role in the economy, and their failure could lead to significant disruption in essential banking services and overall economic activities.
- Government Support: The “too big to fail” designation implies that, in times of distress, the government is expected to provide support to prevent the failure of these banks.
- Advantages and Policy Measures: D-SIBs may enjoy certain advantages in funding due to the perception of government support. Additionally, they are subject to specific policy measures addressing systemic risks and moral hazard issues.
CET1 and Risk-Weighted Assets (RWA):
- CET1 is high-quality regulatory capital absorbing losses immediately.
- RWA link minimum capital requirements to the risk profile of a bank’s lending activities.