1. HDFC Bank too big to fail: Why this crucial tag stamped on just 3 banks in India; read all about it

HDFC Bank too big to fail: Why this crucial tag stamped on just 3 banks in India; read all about it

The Reserve Bank of India has recently identified HDFC Bank as a Domestic Systemically Important Bank. Here's all you need to know about D-SIBs and their importance.

By: | Updated: September 13, 2017 1:42 PM
HDFC Bank too big to fail, SBI, ICICI Bank, Domestic Systemically Important Banks, D-SIBs, reserve bank of india, RBI, Systemically Important Banks are perceived as banks that are ‘Too Big To Fail’. (Image Source: PTI)

The Reserve Bank of India has recently identified HDFC Bank as a Domestic Systemically Important Bank (D-SIB). This is in addition to the State Bank of India and ICICI Bank, which continue to be identified as Domestic Systemically Important Banks (D-SIBs). The additional Common Equity Tier 1 (CET1) requirement for D-SIBs has already been phased-in from April 1, 2016 and will become fully effective from April 1, 2019.

The updated list of Domestic Systemically Important Banks is as follows:

* Risk Weighted Assets

**As per phase-in arrangement

What is a Systemically Important Bank?

Systemically Important Banks (SIBs) are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets. However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future. These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.

Need to identify D-SIBs and methodology

During the recent global financial crisis, it was observed that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy. Government intervention was considered necessary in many jurisdictions to ensure financial stability. Cost of public sector intervention and consequential increase in moral hazard required that future regulatory policies should aim at reducing the probability of failure of Systemically Important Banks (SIBs) and the impact of the failure of these banks.

In October 2010, the Financial Stability Board (FSB) recommended that all member countries needed to have in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions. The Basel Committee on Banking Supervision (BCBS) came out with a framework in November 2011 for identifying the Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs. The BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).

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 every year in August 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 CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.

The higher capital requirements are applicable from April 1, 2016 in a phased manner and will become fully effective from April 1, 2019. The additional common equity requirement for different buckets over the four year phase-in period is as under:

Based on the methodology provided in the D-SIB Framework and data collected from banks as on March 31, 2015 and March 31, 2016, respectively, the Reserve Bank of India had announced State Bank of India and ICICI Bank Ltd as D-SIBs on August 31, 2015 and August 25, 2016, respectively. The current update is based on the data collected from banks as on March 31, 2017.

(With inputs from RBI)

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