Sunday, 6 September 2015

Domestic Systemically Important Banks (D-SIBs)

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?

  • 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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