RBI today retained ‘too big to fail’ tag for the state-owned SBI and private lender ICICI Bank for the second year in a row, calling them systemically important banks for 2016 requiring higher level of supervision. In 2015, these two were identified for the first time as the domestic systemically important banks.
Systemically important banks are subjected to higher levels of supervision to prevent disruption to financial services in the event of any failure.
Based on the Domestic Systemically Important Banks (D-SIBs) Framework and data collected from lenders as on March 31, 2016, these two have again been declared D-SIBs in 2016. “RBI has identified State Bank of India (SBI) and ICICI Bank as Domestic Systemically Important Banks (D-SIBs) in 2016 and has retained their bucketing structure as it was last year,” the central bank said in a statement.
The additional Common Equity Tier 1 (CET1) requirement for D-SIBs has to be done in phases. For these two, it has already been phased in from April 1, 2016, and will become fully effective April 1, 2019.
“The additional CET1 requirement will be in addition to the capital conservation buffer,” RBI added.
Additional CET 1 requirement as a percentage of risk weighted assets (RWAs) for SBI and ICICI Bank stands at 0.6 pr cent and 0.2 per cent, respectively.
As per the framework, RBI will determine a cut-off score to determine which banks make the cut.
Banks are plotted into four different buckets and will be required to have additional Common Equity Tier 1 (CET1) capital requirement ranging from 0.2 per cent to 0.8 per cent of risk weighted assets, depending on the bucket they are plotted into.
The framework requires RBI to disclose the names of banks designated as D-SIBs every year in August.
Systemically important banks are perceived as ones that are ‘too big to fail (TBTF)’. This perception of TBTF creates expectation of government support for them in distress. These banks also enjoy certain advantages in funding markets.
However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions and increases probability of distress in future.