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Systemically Important Banks

Context:

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).

Relevance:

GS III: Indian economy

Dimensions of the Article:

  1. What are Systemically Important Banks (SIBs)?
  2. How are D-SIBs determined?
  3. What regulations do these banks need to follow?

What are Systemically Important Banks (SIBs)?

  • Certain large banks in the nation or the world are thought of as SIBs. They have a big customer base, participate in cross-sector activities, and are seen as “Too Big to Fail (TBTF)” companies.
  • The system of D-SIBs was implemented in the wake of the 2008 financial crisis, which was made worse by the failure of numerous systematically important banks in numerous regions. A failure of one of these banks might result in a substantial and systemic disruption of the nation’s vital economic services and a financial panic.
  • Because of their significance, the government is expected to support major banks during economic downturns in order to prevent further harm.
  • D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.
Types of SIBs
  • Global SIBs: They are identified by BCBS (BASEL Committee on Banking Supervision)
  • Domestic SIBs: They are declared by Central Bank of the country

How are D-SIBs determined?

  • The list of all D-SIBs has been made available by the RBI since 2015.
  • They are divided into five buckets based on how significant they are to the overall economy.
  • The banks are further categorised on the extent of their importance across the five buckets and must have assets that exceed 2 percent of the national GDP in order to be recognised as a D-SIB.
  • The first bucket contains ICICI Bank and HDFC Bank, the third bucket has SBI, and the fifth bucket contains the most significant 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.

-Source:  The Hindu


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