‘Too big to fail’, SBI & ICICI Bank get systemically important tag

By: | Published: September 1, 2015 12:20 AM

The Reserve Bank of India (RBI) on Monday named the State Bank of India and ICICI Bank as Domestic Systemically Important Banks (D-SIBs).

The Reserve Bank of India (RBI) on Monday named the State Bank of India and ICICI Bank as Domestic Systemically Important Banks (D-SIBs).

In determining the D-SIBs, the central bank has used factors like size, interconnectedness, lack of readily available substitutes or financial institution infrastructure and complexity.

RBI also brought out the additional common equity tier-I (CET1) requirements that would be applicable on the D-SIBs. The additional CET-1 requirement as a percentage of risk-weighted assets (RWAs) for SBI will be at 0.6% while for ICICI Bank it stands at 0.2%.

This will be applicable from April 1, 2016, in a phased manner and would become fully effective from April 1, 2019, it said, adding it would be in addition to the capital conservation buffer.

Responding to the move, SBI chairman Arundhati Bhattacharya said, “The additional capital requirement of Tier I capital has been lowered and time for adhering has been deferred by a year compared with the draft guidelines. SBI currently has a higher level of Tier I at 9.62% agaist 7% required under the current guidelines.  We will adhere to the additional requirements as and when they become applicable.”

ICICI Bank MD and CEO Chanda Kochhar said, “Given our size and presence across the financial sector, it was expected that ICICI Bank would be classified as systemically important. The bank’s capital adequacy is well in excess of regulatory requirements and the bank is not expected to require fresh equity capital for the next couple of years.”

The central bank has also stated that in case a foreign bank having branch presence in India is a Global Systemically Important Bank (G-SIB), it has to maintain an additional CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its risk weighted assets.

The D-SIB framework specifies a two-step process of identification of such banks. In the first step, the sample of banks to be assessed for systemic importance has to be decided. The selection of banks in the sample for computation of SIS is based on analysis of their size as a percentage of annual GDP.

The central bank had earlier pointed out that 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 a time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets.

“However, the perceived expectation of the 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,” said the RBI’s framework for dealing with D-SIBs.

The regulator had earlier said that based on the data as of March 31, 2013, about four to six banks may be designated as D-SIBs under various buckets. D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system, it said. The computation of systemic importance scores will be carried out at yearly intervals. The names of the banks classified as D-SIBs will be disclosed in the month of August every year starting from 2015.

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