The Reserve Bank of India on Monday included HDFC Bank to the list of ‘too-big-to-fail’ lenders, also referred to as domestic systemically important banks (DSIBs).
The Reserve Bank of India on Monday included HDFC Bank to the list of ‘too-big-to-fail’ lenders, also referred to as domestic systemically important banks (DSIBs). India’s largest lender SBI and private sector major ICICI Bank were earlier classified as D-SIBs. With the inclusion of HDFC Bank in the list, there will now be three ‘too big to fail’ financial entities in the country.
The D-SIB framework requires the RBI 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.
HDFC Bank falls in bucket 1 and an additional CET-1 requirement of 0.15% will be applicable for it from April 1, 2018.
The central bank had announced SBI and ICICI Bank as DSIBs on August 31, 2015 and August 25, 2016, respectively.
SIBs are seen as ‘too big to fail’, creating expectation of government support for them in times of financial distress. These banks also enjoy certain advantages in funding markets. On the downside, according to some experts, expectations of government support amplifies risk-taking, reduces market discipline, creates competitive distortions and increases probability of distress in future.