Domestic Systemically Important Banks (D-SIBs)

Context: NPAs to rise most for India and Thailand, funds infusion is key: Moody’s report.

“Non Performing Loans (NPLs) will rise most for banks in India and Thailand because of the greater shock to their economies and the historically poor performance of certain loan types. In India its about time, to lay emphasis on Domestic Systemically Important Banks (D-SIBs).

Analysis

  • SBI, ICICI Bank, and HDFC Bank have been identified as Domestic Systemically Important Banks (D-SIBs) by the RBI.
  • The systemically important banks are banks which are tracked more carefully and which are also subject to higher capital requirements under Basel III.
  • 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).
  • Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it.
  • In case a foreign bank having branch presence in India is a Global Systemically Important Bank (G-SIB), it has to maintain additional Common Equity Tier 1 (CET1) capital surcharge in India as applicable to it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.
  • Further the D-SIB framework requires that “The assessment methodology for assessing the systemic importance of banks and identifying D-SIBs will be reviewed on a regular basis. However, this review will be at least once in three years.” 
  • According to the RBI, some banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection.
  • Banks whose assets exceed 2% of GDP are considered part of this group.
  • The RBI stated that should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.
  • D-SIB means that the bank is too big to fail.
  • The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks. Due to this perception, these banks enjoy certain advantages in funding.
  • It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.
  • As per the framework, from 2015, every August, the central bank has to disclose names of banks designated as D-SIB.
  • It classifies the banks under five buckets depending on order of importance.
  • ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three.
  • Based on the bucket in which a D-SIB is, an additional common equity requirement applies.
  • With bucket three being higher than bucket one, SBI has a higher additional requirement than ICICI Bank and HDFC Bank.
  • All the banks under D-SIB are required to maintain higher share of risk-weighted assets as tier-I equity.
  • The concept of D-SIB emerged after the global financial crisis.
  • Whether your bank is in the D-SIB list or not, your fixed deposits are insured up to Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
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