Important Facts For Prelims
Domestic Systemically Important Banks (D-SIBs)
- 16 Nov 2024
- 5 min read
Why in News?
Recently, the Reserve Bank of India (RBI) retained the State Bank of India, HDFC Bank and ICICI Bank as Domestic Systemically Important Banks (D-SIBs).
- The Reserve Bank designated SBI and ICICI Bank as D-SIBs in 2015 and 2016, and HDFC Bank joined them in 2017.
What are the Key Points About D-SIBs?
- About: D-SIBs are banks that are considered ‘Too Big to Fail’ (TBTF) within the domestic economy due to their size, complexity, and interconnections with the financial system.
- These banks are classified based on the potential economic disruption if they fail.
- Importance: D-SIBs are subjected to additional regulatory measures like capital buffers, stress tests, and recovery and resolution planning to enhance their resilience and ability to withstand financial shocks.
- Bucketing Structure: D-SIBs are classified into different buckets based on their systemic importance scores.
- Bucket 1 represents the lowest risk, while Bucket 4 represents the higher risk.
- The RBI has placed SBI in bucket 4, HDFC Bank in bucket 3 and ICICI Bank in bucket 1.
- Capital Requirements: Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it.
- SBI has an additional 0.80% common equity tier 1 (CET1) requirement, HDFC Bank has 0.40%, and ICICI Bank has 0.20%.
- Selection Process: The RBI follows a two-step process for identifying D-SIBs.
- Sample Selection: Not all banks are assessed. Only those with significant systemic importance based on size (banks with assets over 2% of GDP) are considered.
- Systemic Importance Assessment: Based on a range of indicators like lack of substitutability, interconnectedness etc a composite score is calculated for each bank, and those exceeding a certain threshold are classified as D-SIBs.
- Framework for D-SIBs: RBI issued a framework in July 2014 to ensure D-SIBs are well-capitalised to absorb losses and prevent systemic disruptions if they fail.
- Global Systemically Important Banks (G-SIBs): G-SIBs are large international banks whose failure would have a global impact.
- Financial Stability Board (FSB), in consultation with Basel Committee on Banking Supervision (BCBS) and national authorities identifies G-SIBs.
- As of 2023, there are 29 G-SIBs including JP Morgan Chase, Bank of America, Citigroup, HSBC, Agricultural Bank of China, Bank of China, Barclays and BNP Paribas.
Note:
- Common Equity Tier 1 (CET1) covers liquid bank holdings such as cash and stock. CET1 is a capital measure that was introduced in 2014 as a precautionary way to protect the economy from a financial crisis.
- The FSB is an international body that monitors and makes recommendations about the global financial system.
- FSB was established in 2009 under the aegis of G20.
UPSC Civil Services Examination, Previous Year Question (PYQ)
Prelims
Q.Consider the following statements: (2018)
- Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if the account-holders fail to repay dues.
- CAR is decided by each individual bank.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Ans: (a)
Q.‘Basel III Accord’ or simply ‘Basel III’, often seen in the news, seeks to (2015)
(a) develop national strategies for the conservation and sustainable use of biological diversity
(b) improve banking sector’s ability to deal with financial and economic stress and improve risk management
(c) reduce the greenhouse gas emissions but places a heavier burden on developed countries
(d) transfer technology from developed countries to poor countries to enable them to replace the use of chlorofluorocarbons in refrigeration with harmless chemicals
Ans: (b)