Domestic Systemically Important Banks (D-SIBs)

16.11.2024

Domestic Systemically Important Banks (D-SIBs)

Why in the news?   

           State Bank of India, HDFC Bank and ICICI Bank have again been named as Domestic Systemically Important Banks (D-SIBs) by the Reserve Bank of India.

About Domestic Systemically Important Banks (D-SIBs):

• It means that the bank is too big to fail.
• According to the RBI, some banks become systemically important due to their size, cross-jurisdictional activities, complexity, and lack of substitutes and interconnection.
• A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic.
• As a result of their importance, the government is expected to bail out these banks in times of economic distress to prevent widespread harm.
• Additionally, D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.
• Due to this perception, these banks enjoy certain advantages in funding.
• The system of D-SIBs was adopted in the aftermath of the 2008 financial crisis, where the collapse of many systemically important banks across various regions further fueled the financial downturn.

How are D-SIBs determined?

• Since 2015, the RBI has been releasing the list of all D-SIBs.
• They are classified into five buckets, according to their importance to the national economy.
• In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 percent of the national GDP.
• The banks are then further classified on the level of their importance across the five buckets.
• Right now, there are three D-SIBs in India—SBI, HDFC Bank, and ICICI Bank.
• ICICI Bank and HDFC Bank are in bucket one, while SBI falls in bucket three, with bucket five representing the most important D-SIBs.

What regulations do these banks need to follow?

• Due to their economic and national importance, the banks need to maintain a higher share of risk-weighted assets as Tier-I equity.
• SBI, since it is placed in bucket three of D-SIBs, has to maintain Additional Common Equity Tier 1 (CET1) at 0.60 percent of its Risk-Weighted Assets (RWAs).
• ICICI and HDFC, on the other hand, have to maintain Additional CET1 at 0.20 percent of their RWA due to being in bucker one of D-SIBs.

                                                                 Source: Business standard

Consider the following statements regarding Domestic Systemically Important Banks (D-SIBs):

Statement-I:A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic.

Statement-II:In order to be listed as a D-SIB in India, a bank needs to have assets that exceed 10 percent of the national GDP.

Which one of the following is correct in respect of the above statements?

A.Both Statement-I and Statement-II are correct, and Statement-II is the correct explanation for Statement-I.

B.Both Statement-I and Statement-II are correct, and Statement-II is not the correct explanation for Statement-I.

C.Statement-I is correct, but Statement-II is incorrect.

D.Statement-I is incorrect, but Statement-II is correct.

Answer C