Systemically Important Banks

Banking Awareness: Systemically Important Banks

Systemically Important Banks

In easy language, Systemically Important Banks are those banks that are of high importance to a country and if such banks fail, it will have a major negative impact on the economy.

History of Systemically Important Banks

  • Recommendation of FSB: Financial Stability Board (FSB) in October 2010 recommended that all its member countries need to establish a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions.
  • Framework by BCBS: After this, the Basel Committee on Banking Supervision (BCBS) came out with a framework for identifying the Global Systemically Important Banks (G-SIBs) in November 2011. It also mentioned the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs.
  • The requirement of D-SIBs: Further, BCBS required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).

Definition of Systemically Important Banks

These are those banks that are ‘Too Big To Fail (TBTF)’. A bank is a Systemically Important Bank due to its size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness.

Bucket criteria in Systemically Important Banks

The Systemically Important Banks are further divided into buckets. These buckets are decided based on the Higher loss absorbency requirement for a bank (common equity as a percentage of risk-weighted assets). Presently there are 5 buckets. Bucket 1, Bucket 2,….., Bucket 5. Higher the bucket, better is the bank.

Types of Systemically Important Banks

There are two types of Systemically Important Banks:

  1. Global Systemically Important Banks (G-SIBs)– These banks are of importance to the whole world. These are selected by Financial Stability Board (FSB), in consultation with the Basel Committee on Banking Supervision (BCBS) . Every year in November, FSB releases the list of G-SIBs. Total number of G-SIBs at present=30.
  2. Domestic Systemically Important Banks (D-SIBs)– These are the banks that are important to a particular country. Such banks are selected by the Central bank of the country.

Domestic Systemically Important Banks (D-SIBs) in India

  • Being the Central Bank in India, the Reserve bank of India carries out the task of selecting the D-SIBs in the country.
  • RBI uses the BCBS methodology for identifying the D-SIBs.
  • The first condition is that a Bank having a size of more than 2% of GDP can be selected as D-SIBs.
  • The selection of a bank as D-SIBs by RBI is based on four indicators. These are:
    1. Size;
    2. Interconnectedness;
    3. Substitutability/financial institution infrastructure (including considerations related to the concentrated nature of the banking sector); and
    4. Complexity (including the additional complexities from cross-border activity)
  • The names of the banks classified as D-SIBs is disclosed by RBI in the month of August every year starting from 2015.

List of D-SIBS in India

Presently there are three banks that are Domestic Systemically Important Banks (D-SIBs) in India. These are:

  • State Bank of India– Bucket 3
  • ICICI Bank– Bucket 1
  • HDFC Bank– Bucket 1
Bucket Higher loss absorbency requirement (common equity as a
percentage of risk-weighted assets)
5 (Empty) 1.00%
4 0.80%
3 0.60%
2 0.40%
1 0.20%

BCBS Principles for dealing with Domestic Systemically Important Banks (D-SIBs)- there are 12 principles (detail not required)


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