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Domestic Systemically Important Banks

  Nov 30, 2017

Domestic Systemically Important Banks

Domestic Systemically Important Banks (D-SIBs)
Reserve Bank of India (RBI) has included HDFC Bank in the list of 'too big to fail' lenders. With the inclusion of HDFC Bank in the list, there are now three 'too big to fail' financial entities, SBI AND ICICI, in the country.

Too big to fail
When a financial entity like a bank becomes systemically so important that their failure is expected to disrupt the financial/banking system and the economy as a whole then that entity is termed as too big to fail. In an event that such a bank fails the government steps in to save it.

RBI categorises such banks as Domestic Systemically Important Banks (D-SIBs). These banks have, according to RBI, assumed systemic importance due to their:
  1. Size,
  2. Cross-jurisdictional activities,
  3. Complexity,
  4. Lack of substitutability and
  5. Interconnectedness.
The failure of these banks can cause significant disruption to the essential services provided by the banking system, and in turn, can disrupt the overall economic activity. These banks are considered Systemically Important Banks (SIBs) as their continued functioning is critical for the uninterrupted availability of essential banking services to the real economy.

What does it mean for the banks?
  1. Apart from protection from the RBI in the times of distress, the D-SIBs will be subjected to higher levels of supervision so as to prevent disruption of financial services in the event of any failure.
  2. These banks will have to maintain a core capital requirement in addition to a capital conservation buffer.
  3. Moreover, expectations of government support amplifies risk-taking, reduces market discipline, creates competitive distortions and increases probability of distress in future.