Domestic Systemically Important Banks (D-SIBs)

Context: Recently, the Reserve Bank of India (RBI) issued its list of Domestic Systemically Important Banks (D-SIBs).

News:

• In the recent update by the Reserve Bank of India (RBI), both the State Bank of India (SBI) and HDFC Bank have been reclassified to higher tiers, while ICICI Bank maintains its existing categorization from the previous year
• The revised classifications place SBI in buckets 3 to 4 and HDFC Bank in buckets 1 to 2.
• This adjustment is attributed to the recognition of HDFC Bank's heightened systemic significance following the merger of the former HDFC Limited into HDFC Bank on July 1, 2023.
• The update influences the application of an additional common equity requirement, determined by the assigned bucket for a Domestic Systemically Important Bank (D-SIB). Common Equity Tier 1 (CET1), constituting part of Tier 1 capital, primarily consists of common stock held by a bank or other financial institution.

About Domestic Systemically Important Bank (D-SIB):

• The Reserve Bank introduced the Framework for managing Domestic Systemically Important Banks (D-SIBs) in 2014.
• According to the D-SIB framework, the Reserve Bank is obligated to reveal the names of designated D-SIBs annually, beginning in 2015.
• The designation involves placing these banks into specific buckets, determined by their Systemic Importance Scores (SISs).
• Depending on the assigned bucket, an extra common equity requirement must be imposed on a D-SIB.

Features:

• The designation of Domestic Systemically Important Banks (D-SIBs) implies that these banks are deemed 'too big to fail.'
• In the event of a bank failure, there would be significant disruptions to crucial services provided by the bank to both the banking system and the broader economy.
• The 'too big to fail' designation also signifies an expectation that the government will provide support to these banks in times of financial distress.
• The Reserve Bank of India (RBI) classifies these banks into five buckets based on their order of importance
• Factors contributing to the systemic importance of these banks include their size, cross-jurisdictional activities, complexity, and a lack of substitutes and interconnections.
• A quantitative criterion for inclusion in this group is that banks with assets exceeding 2% of the Gross Domestic Product (GDP) are considered part of the D-SIBs.
• Due to their economic and national significance, these banks are required to maintain a higher proportion of risk-weighted assets as tier-I equity, resulting in enhanced capital requirements.