Why in news?

The Reserve Bank of India (RBI) has maintained the State Bank of India, HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs), meaning they are classified as "Too Big To Fail."

This status indicates that their stability is essential for providing uninterrupted banking services to the economy. The banks remain in the same risk category as in the 2023 D-SIB list.

What’s in today’s article?

• Domestic Systemically Important Banks (D-SIBs)

Domestic Systemically Important Banks (D-SIBs)

• About
  • D-SIBs are highly integrated into cross-jurisdictional activities and possess complex financial structures, making them essential to the economy.
  • Their failure could cause widespread disruption and economic panic. Consequently, the government is likely to bail them out during financial crises.
    • SIBs are perceived as "Too Big To Fail" (TBTF), creating expectations of government support during crises.
    • This perception enables SIBs to enjoy advantages in funding markets but also encourages risk-taking and reduces market discipline.
  • D-SIBs are also subject to specific regulations addressing systemic risks and moral hazard concerns.
• Need for the creation of D-SIBs
  • To address the systemic risks and moral hazard issues associated with SIBs, the RBI requires these banks to follow additional regulatory measures.
  • These measures are aimed at controlling potential competitive distortions and future financial distress.
• Background – Framework for D-SIBs
  • RBI had issued the Framework for dealing with D-SIBs in July 2014.
  • The D-SIB framework mandates annual disclosure of banks designated as D-SIBs since 2015.
  • It categorizes them into buckets based on their Systemic Importance Scores (SISs).
• Regulations these banks need to follow
  • Depending on the bucket in which a D-SIB is placed, an additional common equity requirement [Common Equity Tier 1 (CET1)] is applicable to it.
    • Tier 1 capital (measured by the capital adequacy ratio (CAR)) is the core measure of a bank's financial strength from a regulator's point of view.
  • It means that these banks have to earmark additional capital and provisions to safeguard their operations.
  • Foreign banks in India that are classified as Global Systemically Important Banks (G-SIBs).
    • G-SIBs must maintain an additional CET1 capital surcharge in India, proportionate to their Risk Weighted Assets (RWAs) in India, as specified by their home regulator.
    • Notable G-SIBs for 2023 include JP Morgan Chase, Bank of America, Citigroup, HSBC, Agricultural Bank of China, Bank of China, Barclays, and BNP Paribas.
• Two-Step Process for Selecting D-SIBs
  • RBI uses a two-step process to assess banks' systemic importance.
  • A sample of banks is selected, excluding smaller banks to avoid unnecessary data burden.
    • Only banks above a certain size are assessed, as smaller banks are deemed lower in systemic importance.
    • Banks are chosen based on their size, calculated as a percentage of GDP using the Basel III Leverage Ratio Exposure Measure.
    • Banks with a size above 2% of GDP are included in the sample.
  • Once the sample is selected, RBI calculates a composite score based on various indicators.
    • Banks that exceed a set threshold are classified as D-SIBs and placed into different buckets depending on their systemic importance.
    • D-SIBs in lower buckets face a smaller capital surcharge, while those in higher buckets face a higher surcharge, ensuring a graded approach to capital requirements based on risk.
• Which banks have been classified as D-SIBs by the RBI?
• RBI has reaffirmed SBI, HDFC Bank, and ICICI Bank as D-SIBs, retaining their positions from the 2023 list.
  • SBI and ICICI Bank were first designated as D-SIBs in 2015 and 2016, with HDFC Bank joining them in 2017.
• SBI has been placed in bucket 4, HDFC Bank in bucket 3 and ICICI Bank in bucket 1.
• Capital requirements for these D-SIBs
  • The RBI requires additional CET1 capital for D-SIBs based on their assigned buckets, ranging from 0.20% to 0.80% of risk-weighted assets (RWAs).
  • Currently, SBI's additional CET1 requirement is 0.80%, HDFC Bank's is 0.40%, and ICICI Bank's is 0.20%.
  • G-SIBs with branches in India must maintain an additional CET1 surcharge proportionate to their Indian RWAs, based on the CET1 buffer set by their home regulator.