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Domestic Systematically Important Banks
News: Reserve Bank of India has released its list of Domestic Systemically Important Banks (D-SIBs) in 2021.It has identified the state-owned lender State Bank Of India and the private lenders ICICI Bank and HDFC Bank as systemically important banks, which are perceived as banks, ‘too big to fail’.
• The system of D-SIBs was adopted in the aftermath of the 2008 financial crisis where the collapse of many systematically important banks across various regions further fueled the financial downturn.
• D-SIBs are important for the country’s economy. In events of distress, the government supports such banks and if such a bank fails, it would lead to disruption of the country’s overall economy.
• RBI finalizes such banks after considering factors like size, complexity, lack of substitutability and interconnectedness of the banks, state reports.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.
• 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).
• Should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks.
• Due to this perception, these banks enjoy certain advantages in funding. It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.