Banking is the backbone of any economy. A robust banking system is imperative for the growth of any country. All banks have their contribution in economic growth. Few banks, however, become systemically significant due to their size, cross-judicial activities, lack of implementation complexity, substitution and interconnectedness. These banks are so important as a result of their characteristics that they cannot fail easily. Due to this belief, these banks are supported by the government in times of crisis.
The Basel Committee on Banking Supervision (BCBS) finalized its framework for G-SIBs in October 2012. The G-SIBs framework focuses on ensuring that the failure of banks does not impact the domestic economy. Unlike the G-SIBs framework, the D-SIBs framework is based on evaluations done by national authorities.
D-SIBs of India:
The Reserve Bank had issued the Framework for dealing with Domestic Systemically Important Banks (D-SIBs) on July 22, 2014. 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).
RBI has identified the state-owned lender State Bank Of India and the private lenders ICICI Bank and HDFC Bank as systemically important banks, which are perceived as banks, ‘too big to fail’.
Significance of D-SIBs:
Systemically Important Banks (SIBs) are subject to additional policy measures to deal with systemic risks and the moral hazards posed by them, i.e. these banks may adopt additional policy measures in case of crisis. Systemic risk can be defined as the risk associated with failure or failure of a company, industry, financial institution or the economy as a whole. Whereas, the Moral hazard is a situation in which one party engages in a risky event on the assumption that it is protected from the risk and that the cost of the risk will be borne by the other party.
Due to the failure of these banks, the essential services provided by the banking system may also get disrupted, which has a negative impact on their overall economic activities.
How Banks are designated as D-SIBs?
Indicators used for valuation include the size of the bank, interrelationships, position of replacement, and operational complexity. Banks are placed in different groups on the basis of their systemically significant scores.
Domestic-systemically important banks (D-SIBs) are expected to maintain an additional common equity Tier 1 (CET1) capital requirement of between 0.20 percent and 0.80 percent of risk weighted assets (RWAs). CET1 is that amount of capital, in the presence of which any risk can be easily managed. It is a capital measure, introduced globally in 2014 as a protective instrument to protect the economy from financial crisis.
If a foreign bank branch is located in India as a Globally-Systemically Important Bank (G-SIBs), it will be subject to additional CET1 capital surcharge as applicable to G-SIBs in proportion to its Risk Weighted Assets in India will have to be maintained.