“Banks that are too big to fail” refers to financial institutions that are so significant to the economy that their failure could have catastrophic effects on the financial system of the country. These banks are usually large, interconnected, and pivotal to the financial system.
In the context of India, banks that are too big to fail include the State Bank of India (SBI), ICICI Bank, and HDFC Bank. These banks are considered important due to their size and their critical role in the Indian financial system. For example, SBI is the largest bank in India, accounting for nearly a quarter of the country’s total banking assets.
Classification of Systemically Important Banks
To minimize the risks associated with large, complex financial institutions, the Reserve Bank of India (RBI) has classified SBI, ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks (D-SIBs).
The classification process involves a two-step assessment. Firstly, a sample of banks is chosen based on their size as a percentage of GDP. Banks with a size beyond 2% of GDP are selected for this categorization. Secondly, the ranking of systemic importance is done based on a range of indicators. Based on their systemic importance scores, various measures and provisions are implemented.
The measures include:
- Capital charge: A D-SIB in the lower bucket will attract a lower capital charge, and a D-SIB in the higher bucket will attract a higher capital charge. This is done to ensure that the banks have sufficient capital to absorb potential losses.
- Supervisory monitoring: The RBI imposes additional supervisory monitoring on D-SIBs to ensure that they maintain a sound financial position.
Implications for IAS Exam
The concept of banks that are too big to fail is an important topic for the IAS exam. It is essential for aspirants to understand the classification process of D-SIBs and the measures taken by the RBI to minimize the risks associated with large, complex financial institutions.
Furthermore, aspirants should be aware of the potential impact of the failure of a systemically important bank on the economy. The failure of a D-SIB could lead to a chain reaction that could collapse the entire financial system. It is, therefore, crucial for the RBI to implement measures to ensure the stability of the financial system.
MCQs on Measures to Minimize Risks of Important Banks in India
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What is the meaning of “banks that are too big to fail”?
A. Financial institutions that are considered too important to fail.
B. Small financial institutions that are less important.
C. Financial institutions that are not interconnected with the economy.
D. Financial institutions that are not significant to the country’s financial system.
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Which of the following banks in India have been classified as Domestic Systemically Important Banks (D-SIBs) by RBI?
A. SBI, ICICI Bank, and HDFC Bank.
B. HDFC Bank, Axis Bank, and Kotak Mahindra Bank.
C. Punjab National Bank, Bank of Baroda, and Canara Bank.
D. State Bank of India, Indian Bank, and Union Bank of India.
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What is the two-step process used by RBI to categorize banks as D-SIBs?
A. Assess banks based on their size and rank them based on a range of indicators.
B. Assess banks based on their location and rank them based on their profits.
C. Assess banks based on their employees and rank them based on their age.
D. Assess banks based on their customers and rank them based on their education level.
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What is the purpose of RBI’s measures for D-SIBs?
A. To minimize the risks associated with large, complex financial institutions.
B. To increase the capital charge for D-SIBs in the lower bucket.
C. To decrease the capital charge for D-SIBs in the higher bucket.
D. To maintain the instability of the financial system.
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