In News:

The Reserve Bank of India (RBI) retained the State Bank of India, HDFC Bank and ICICI Bank as Domestic Systemically Important Banks (D-SIBs).

Overview of D-SIBs

• Definition: D-SIBs are banks that are 'Too Big to Fail' (TBTF) and their failure could significantly disrupt essential banking services, affecting the economy.
• RBI Classification: The Reserve Bank of India (RBI) has designated SBI, HDFC Bank, and ICICI Bank as D-SIBs.
• Bucketing System: These banks are classified into different buckets based on their systemic importance.

Importance of D-SIBs

• Systemic Importance: Banks are considered systemically important due to their:
  • Size
  • Cross-jurisdictional activities
  • Complexity
  • Interconnectedness with the economy
• Impact of Failure: Failure of a D-SIB could cause significant disruption in the banking system and economy, impacting services like payments, loans, etc.

Why D-SIBs are Created

• Risk of Disruption: The failure of a large bank can disrupt essential services and lead to a broader economic crisis.
• TBTF Perception: These banks are often perceived as Too Big to Fail, leading to an expectation of government support during crises. This creates moral hazard, encouraging riskier behavior.

Assessment and Selection of D-SIBs

• Two-Step Process:
  • Step 1: Selection of banks based on their size, complexity, and interconnectedness. Only banks with systemic importance are assessed (e.g., banks with assets > 2% of GDP).
  • Step 2: Calculation of systemic importance score based on a range of indicators. Banks above a certain threshold are classified as D-SIBs.
• Indicators: Size (measured by Basel III Leverage Ratio Exposure Measure), interconnectedness, substitutability, and complexity are key factors.

Bucket Allocation and Capital Requirements

• D-SIBs are assigned to five buckets based on their systemic importance score:
  • Bucket 1: Lowest capital surcharge (e.g., ICICI Bank).
  • Bucket 5: Highest capital surcharge.
• Additional Capital Requirements:
  • SBI: Additional 0.80% CET1 (Common Equity Tier 1) on Risk-Weighted Assets (RWAs).
  • HDFC Bank: Additional 0.40% CET1.
  • ICICI Bank: Additional 0.20% CET1.
  • The higher the bucket, the higher the capital surcharge.

Global Systemically Important Banks (G-SIBs)

• Global List: Identified by the Financial Stability Board (FSB) based on data from the previous year.
• 2023 G-SIB List includes banks like JP Morgan Chase, Bank of America, HSBC, etc.
• Capital Requirement for G-SIBs in India: Foreign G-SIBs with branch presence in India must meet additional CET1 requirements, proportional to their operations in India.

Key Terms

• Risk-Weighted Assets (RWAs): These are used to calculate the minimum capital a bank must hold. It accounts for the risk level of a bank’s assets.
• Common Equity Tier 1 (CET1): The highest quality of capital a bank can hold, primarily made up of common stock, to absorb losses in times of distress.