Daily Current Affairs : 14-November-2024
On December 6, 2024, the Reserve Bank of India (RBI) announced that it will continue to classify three major Indian banks—State Bank of India (SBI), HDFC Bank, and ICICI Bank—as Domestic Systemically Important Banks (D-SIBs). This classification underscores the critical role these institutions play in the Indian economy and financial system. The following explores the concept of D-SIBs, their importance, and the criteria for their classification.
What Are Domestic Systemically Important Banks (D-SIBs)?
D-SIBs are banks that are considered “Too Big to Fail” (TBTF) because their size, interconnectedness, and importance to the economy make them essential for the smooth functioning of the financial system. The failure of a D-SIB could lead to widespread disruptions in financial services, affecting businesses and consumers alike.
- Key Features of D-SIBs:
- Large size and global interconnectedness.
- Significant role in the national economy.
- Potential to disrupt the financial system if they fail.
Need for D-SIB Classification
The classification of D-SIBs helps in managing systemic risk. By identifying these institutions, regulators can impose additional capital and regulatory requirements to prevent disruptions. This also reduces moral hazards, ensuring that these banks remain well-capitalized and resilient.
- Key Objectives:
- Prevent systemic risk to the economy.
- Ensure uninterrupted banking services.
- Provide additional regulatory oversight.
Categories and Capital Requirements for D-SIBs
D-SIBs are divided into different “buckets” based on their systemic importance. Each bank is assigned a bucket, which determines the additional capital they must maintain.
- Buckets and Capital Requirements:
- State Bank of India (SBI): Bucket 4, with an additional 0.80% CET1 requirement.
- HDFC Bank: Bucket 3, with an additional 0.40% CET1 requirement.
- ICICI Bank: Bucket 1, with an additional 0.20% CET1 requirement.
These additional capital requirements will take effect from April 1, 2025.
Selection Criteria for D-SIBs
To be classified as a D-SIB, a bank must meet certain criteria, including its size, complexity, and interconnectedness within the financial system. A composite score is calculated based on the following factors:
- Key Factors in Selection:
- Size (banks with assets >2% of GDP).
- Cross-jurisdictional activity.
- Complexity and interconnectedness with other financial institutions.
Banks that surpass a certain threshold based on these criteria are classified as D-SIBs.
Global Systemically Important Banks (G-SIBs)
Apart from D-SIBs, there are also Global Systemically Important Banks (G-SIBs), identified by the Financial Stability Board (FSB) based on similar criteria. The G-SIB list includes major international banks such as JP Morgan Chase, HSBC, and BNP Paribas.
Important Points:
- D-SIBs Definition: Domestic Systemically Important Banks (D-SIBs) are banks deemed “Too Big to Fail” due to their significant role in the financial system and economy.
- Key D-SIBs in India: The Reserve Bank of India (RBI) has retained State Bank of India (SBI), HDFC Bank, and ICICI Bank as D-SIBs.
- D-SIBs Classification: Banks are placed in different buckets based on their systemic importance:
- SBI: Bucket 4, additional capital requirement of 0.80% of Risk Weighted Assets (RWAs).
- HDFC Bank: Bucket 3, additional capital requirement of 0.40% of RWAs.
- ICICI Bank: Bucket 1, additional capital requirement of 0.20% of RWAs.
- Capital Requirements: Additional Common Equity Tier 1 (CET1) capital is required for D-SIBs, with higher surcharges to be applied from April 1, 2025.
- Purpose of D-SIB Classification: To mitigate systemic risk, ensure continuous banking services, and provide stronger regulatory oversight.
- Selection Criteria for D-SIBs:
- Banks with assets over 2% of GDP are assessed.
- Criteria include size, cross-jurisdictional activity, complexity, substitutability, and interconnectedness.
- Global Systemically Important Banks (G-SIBs): These are large international banks, identified by the Financial Stability Board (FSB), including JP Morgan Chase, HSBC, and BNP Paribas.
- Impact: D-SIB classification ensures banks remain resilient, reducing the risk of financial disruptions and boosting confidence in the banking system.
Why In News
The Reserve Bank of India (RBI) on Wednesday retained the State Bank of India, HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs), emphasizing their critical role in maintaining the stability of the country’s financial system and ensuring uninterrupted banking services for the economy.
MCQs about Understanding Domestic Systemically Important Banks (D-SIBs) in India
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Which of the following banks were retained as Domestic Systemically Important Banks (D-SIBs) by the Reserve Bank of India (RBI) in December 2024?
A. Axis Bank, HDFC Bank, ICICI Bank
B. State Bank of India (SBI), HDFC Bank, ICICI Bank
C. State Bank of India (SBI), Bank of Baroda, ICICI Bank
D. HDFC Bank, ICICI Bank, Kotak Mahindra Bank
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What is the primary purpose of classifying banks as Domestic Systemically Important Banks (D-SIBs)?
A. To increase their market share
B. To reduce operational costs
C. To mitigate systemic risk and ensure stability in the financial system
D. To encourage foreign investment
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How are banks categorized under D-SIBs based on their systemic importance?
A. By their geographical presence
B. By their customer base
C. By their size, complexity, and interconnectedness
D. By their profit margins
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What is the additional capital requirement for the State Bank of India (SBI) as a Domestic Systemically Important Bank (D-SIB)?
A. 0.20% of Risk Weighted Assets (RWAs)
B. 0.40% of Risk Weighted Assets (RWAs)
C. 0.80% of Risk Weighted Assets (RWAs)
D. 1.00% of Risk Weighted Assets (RWAs)
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