Context: Recently, the Reserve Bank of India (RBI) issued its list of Domestic Systemically Important Banks (D-SIBs). 

RBI Releases Latest List of Domestic Systemically Important Banks

• RBI’s Updated Categorization: RBI moved State Bank of India (SBI) and HDFC Bank to higher buckets in its latest update. At the same time, ICICI Bank continues to be in the same bucketing structure as last year.
  • SBI (buckets 3 to 4) and HDFC Bank (buckets 1 to 2).
• Basis of Updation: The current update is based on the factoring in the increased systemic importance of HDFC Bank post the merger of erstwhile HDFC Limited into HDFC Bank on July 1, 2023.
• Common Equity Requirement: Based on the bucket in which a D-SIB is placed, an additional common equity requirement must be applied.
  • Common Equity Tier 1 (CET1) is a component of Tier 1 capital primarily common stock held by a bank or other financial institution. 

About Domestic Systemically Important Banks (D-SIBs)

• The Reserve Bank issued the Framework for dealing with Domestic Systemically Important Banks (D-SIBs) in 2014. 
• The D-SIB framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs starting from 2015 and place them in appropriate buckets depending on their Systemic Importance Scores (SISs). 
  • Based on the bucket in which a D-SIB is placed, an additional common equity requirement must be applied. 
  • ‘Too big to fail’:  D-SIB means that the bank is ‘too big to fail’. 
  • Potential Ramifications of Failure: If a bank fails, there would be significant disruption to the essential services it provides to the banking system and the overall economy.

Key Features of the Domestic Systemically Important Banks (D-SIBs)

• Government Support: The too-big-to-fail tag also indicates that the government is expected to support these banks in case of distress.
• Classification: RBI classifies the banks under five buckets depending on the order of importance.
• Factors Contributing to Systemic Importance: These banks become systemically important due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. 
• Quantitative Criterion: Banks whose assets exceed 2% of GDP are considered part of this group. 
• Enhanced Capital Requirements: Due to their economic and national importance, the banks need to maintain a higher share of risk-weighted assets as tier-I equity.

News Source: Livemint