The Reserve Bank of India (RBI) has retained State Bank of India (SBI), ICICI Bank and HDFC Bank as domestic systemically important banks (D-SIBs) for 2021.
key points
- It means, these banks are “too big to fail”. The ‘too big to fail’ is a phrase used to describe a bank or company that’s so entwined in the economy that its failure would be catastrophic.
- ‘Too-big-to-fail’ lenders are banks whose failure could impact the financial system as a whole because of their size and interconnectedness.
- On July 22, 2014, the Reserve Bank published the Framework for handling Domestic Systemically Important Banks (D-SIBs).
- The D-SIB framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs starting from 2015 and place these banks in appropriate buckets depending upon their systemic importance scores (SISs).
- In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 percent of the national GDP. The banks are then further classified on the level of their importance across the five buckets.
- The additional Common Equity Tier 1 (CET1) requirement for DSIBs was phased in from April 1, 2016 and became fully effective from April 1, 2019 and the additional CET1 requirement will be in addition to the capital conservation buffer.
- ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three, with bucket five representing the most important D-SIBs.
- According to RBI, based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it.
- 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.
- This list is published every year.
- In case a foreign bank having branch presence in India is a Global Systemically Important Bank (G-SIB), it has to maintain additional CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.
