SVB, Signature Bank collapse: What are ‘Too-Big-To-Fail’ banks, and what makes Indian banks safe

Source: The post is based on the article “SVB, Signature Bank collapse: What are ‘Too-Big-To-Fail’ banks, and what makes Indian banks safe” published in the Indian Express on 16th March 2023.

Syllabus: GS – 3: Effects of liberalization on the economy.

Relevance: About SVB failure and its impact on India.

News: The fall of Silicon Valley Bank (SVB) has had its effects around the world.

Why are Indian banks less vulnerable to bank failures?

This is because a) India’s domestic banks have a different balance sheet structure, where deposits cannot be withdrawn in bulk quantities like SVB, b) Household savings constitute a major part of bank deposits in India. On the other hand, in the US a large portion of bank deposits are from corporates, c) A large part of Indian deposits is with public sector banks, and most of the rest is with very strong private sector lenders, d) The approach of the regulator has generally been that depositors’ money should be protected at any cost, e) India have domestic systemically important banks (D-SIBs) and f) While the Basel-III Norms prescribe a capital adequacy ratio (CAR) of 8%, the RBI has mandated a CAR of 9% for scheduled commercial banks and 12% for public sector banks.

About Global-SIBs

Need: 2008 financial crisis highlighted the issues with large and highly interconnected financial institutions in the real economy.

Recommendation: In 2010, the Financial Stability Board (FSB) recommended that all member countries should put in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions.

Further, the Basel, Switzerland-based Financial Stability Board (FSB) has identified a list of global systemically important banks (G-SIBs).

G-SIBs at present: There are 30 G-SIBs currently, including JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank, and Goldman Sachs. No Indian bank is on the list.

Advantages of being SIBs: They are perceived as banks that are ‘Too Big To Fail (TBTF)’, due to which these banks enjoy certain advantages in the funding markets.

How does the RBI Select D-SIBs in India?

The RBI follows a two-step process to assess the systemic importance of banks.

First, a sample of banks to be assessed for their systemic importance is decided. Banks having a size beyond 2% of GDP will be selected in the sample.

Second, Once the sample of banks is selected, a detailed study to compute their systemic importance is initiated. Based on the study, a composite score of systemic importance is computed for each bank. Banks that have systemic importance above a certain threshold are designated as D-SIBs.

Next, the D-SIBs are segregated into buckets based on their systemic importance scores.

What are the concerns associated with D-SIBs?

D-SIB tag indicates that in case of distress, the government is expected to support these banks. This a) encourages risk-taking, b) reduces market discipline, c) creates competitive distortions, and d) increases the probability of distress in the future.

So the RBI recommended that the SIBs should be subjected to additional policy measures to guard against systemic risks and moral hazard issues