What are Domestic Systemically Important Banks (D-SIBs)?

About Domestic Systemically Important Banks (D-SIBs):

• D-SIB means that the bank is too big to fail.
• According to the RBI, some banks become systemically important due to their size, cross-jurisdictional activities, complexity, and lack of substitutes and interconnection.
• A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic.
• As a result of their importance, the government is expected to bail out these banks in times of economic distress to prevent widespread harm. 
• Additionally, D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.
• Due to this perception, these banks enjoy certain advantages in funding.
• The system of D-SIBs was adopted in the aftermath of the 2008 financial crisis, where the collapse of many systematically important banks across various regions further fueled the financial downturn.
• How are D-SIBs determined?
  • Since 2015, the RBI has been releasing the list of all D-SIBs.
  • They are classified into five buckets, according to their importance to the national economy.
  • In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 per cent of the national GDP.
  • The banks are then further classified on the level of their importance across the five buckets.
  • Right now, there are three D-SIBs in India—SBI, HDFC Bank, and ICICI Bank.
  • ICICI Bank and HDFC Bank are in bucket one, while SBI falls in bucket three, with bucket five representing the most important 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.