Reserve Bank of India (RBI) today identified state-owned SBI and private sector ICICI Bank as systemically important banks and subjected them to higher levels of supervision to prevent disruption to financial services in event of any failure.
“The Reserve Bank of India announced today the designation of State Bank of India and ICICI Bank Ltd as Domestic Systemically Important Banks (D-SIBs),” the central bank said in a statement.
“D-SIBs will be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system,” the central bank said in a statement.
As per the framework for dealing with D-SIBs, RBI will determine a cut-off score beyond which banks will be considered as D-SIBs.
Banks will be 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 upon the bucket they are plotted into.
Additional CET1 requirement as a percentage of Risk Weighted Assets (RWAs) for SBI is 0.6 per cent and that of ICICI Bank is 0.2 per cent, RBI said
The additional CET1 requirements will be applicable from April 1, 2016, in a phased manner and would become fully effective from April 1, 2019. The additional CET1 requirement will be in addition to the capital conservation buffer.
The framework requires RBI to disclose the names of banks designated as D-SIBs every year in August starting from August 2015.
Systemically important banks 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.
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.
Based on the data as on March 31, 2013, it is expected that about four to six banks may be designated as D-SIBs under various buckets.
Some banks, due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, become systemically important.
The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity.
Therefore, the continued functioning of systemically important banks is critical for the uninterrupted availability of essential banking services to the real economy, RBI said.
The assessment methodology adopted by RBI is primarily based on the Basel Committee on Banking Supervision (BCBS) methodology for identifying the G-SIBs with suitable modifications to capture domestic importance of a bank.
The indicators which would be used for assessment are: size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed. RBI will determine a cut-off score beyond which banks will be considered as D-SIBs.