Domestic Systematically Important Banks: Why are these banks ‘too big to fail’?

News: The Reserve Bank of India has retained State Bank of India, HDFC Bank and ICICI Bank as Domestic Systematically Important Bank (D-SIBs).

1. Domestic Systematically Important Banks are perceived as ‘too big to fail’ since their failure can have a significant impact on the financial system.

2. They are systematically important because of their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness.

3. They are regulated by D-SIBs Framework of RBI, released in 2014.

4. Banks are placed in 5 different buckets based on their systematic importance score. Example: RBI has placed SBI in bucket 4, HDFC Bank in bucket 3 and ICICI Bank in bucket 1.

5. Based on the placement in buckets, D-SIBs are required to maintain an additional common equity requirement, which varies from 0.20% to 0.80% of the RWAs (Risk Weighted Assets).