Why in news?
The Reserve Bank of India (RBI) on Monday designated India’s top two banks by assets — State Bank of India (SBI) and ICICI Bank Ltd. as Domestic Systemically Important Banks (D-SIBs).
What are D-SIBs?
Implications:
The Reserve Bank of India (RBI) on Monday designated India’s top two banks by assets — State Bank of India (SBI) and ICICI Bank Ltd. as Domestic Systemically Important Banks (D-SIBs).
What are D-SIBs?
- D-SIBs are perceived as banks which are equivalent of too-big-to-fail in other countries. Banks falling in the D-SIB category need to set aside more capital per loan than their peers to prevent a contagion effect which can potentially weigh down other banks in the financial system if there is a crisis.
What prompted RBI to classify?
This was done after the Basel Committee on Banking Supervision (BCBS) directed all member countries to have a regulatory framework to deal with D-SIBs. - These guidelines were issued in the wake of 2008 global financial crisis.
The D-SIB framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs every year in August starting from August 2015
Implications:
- Negative:
- These banks will face greater regulatory scrutiny and will have to maintain higher governance standards.
- They will have to maintain larger buffer reserves and counter-cyclical arrangements would be imposed on them faster than others.
- They will need to be more diligent in assessing the quality and risks of credit.
- This could also hamper their participation in government's social schemes which tends to be comparatively riskier than commercial lending.
- CRAR and CAR have to be maintained at higher levels
- These banks will face difficulty in expansion as they can’t overlook risk in pursuit of acquiring market.
- Positive:
- This will also reduce the chances of their failure and ensures that the risk of economic distress due to stress in the banking system is reduced.
- will reduce the risk of financial crises.
- Their investment will be more secure and as a result it will invite more investment.
- their reliability in the public will get better - growth of banking sector.
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