9/10/2015

BankersAdda:AbriefonDOMESTICALLYSYSTEMICALLYIMPORTANTBANKS

AbriefonDOMESTICALLYSYSTEMICALLYIMPORTANT
BANKS
DearReaders,
Toady we are providing you the brief of DSIBs, which was in news. We
hopethatyouwilllikethispostasthisisagainoneoftheimportanttopicin
theGeneralAwarenesssection.

The Reserve Bank of India announced State Bank of India and ICICI Bank
Ltd as Domestic Systemically Important Banks (DSIBs) & subjected them
to higher levels of supervision to prevent disruption to financial services in
eventofanyfailure.Tounderstandthisbetter,letsdiscussthisindetail.
Whatisasystemicallyimportantbankmeaningis?
Systemically important bank or a bank that is too big to fail, is one whose
failure will have nationwide or worldwide repercussions. A bank failure is a
scenario in which the bank or financial institution is unable to pay its
depositorsorfulfillitsfinancialobligations.
Systemically important banks are perceived as banks that are 'Too Big To
Fail(TBTF)'.ThisperceptionofTBTFcreatesanexpectationofgovernment
supportforthesebanksatthetimeofdistress.Duetothisperception,these
banksenjoycertainadvantagesinthefundingmarkets.
WhyRBIchoosethesebanksasDSIBs?
Primarily because of their size. The RBI uses a methodology to determine
whetherabankissystemicallyimportantornotonthebasisofitssize,inter
connectedness, substitutability and complexity. Such banks have been
termedasdomesticsystemicallyimportantbanks(DSIB).
Waitasecond,whatdothesefactorstakeintoaccount?
Letsconsiderthesefactorsindetail..
Size takes into account all exposures (Loans, savings deposits,
commissionsfrommutualfundbusinesses)ofabank.A
A bank is deemed more interconnected if it has borrowed or lent
moremoneyfromotherbanksorfinancialinstitutions.
Sustainability is a financial infrastructure indicator which
determines if the services provided by the bank are easily
replaceableornot.
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9/10/2015

BankersAdda:AbriefonDOMESTICALLYSYSTEMICALLYIMPORTANTBANKS

Ifabankhashighercomplexitythecostandtimetakentoresolve
itsissueswillhigher.
Basedonthesefactors,RBIhavechoosethemasDSIBs.
FrameworkforDSIBs
The Reserve Bank had issued the Framework for dealing with Domestic
Systemically Important Banks (DSIBs) on July 22, 2014. The DSIB
Framework requires the Reserve Bank to disclose the names of banks
designatedasDSIBseveryyearinAuguststartingfromAugust2015.
The Framework also requires that DSIBs may be placed in four buckets
dependingupontheirSystemicImportanceScores(SISs).
Based on the bucket in which a DSIB is placed, an additional common
equity requirement has to be applied to it, as mentioned in the DSIB
Framework.
Based on the methodology provided in the DSIB Framework and data
collected from banks as on March 31, 2015, the banks identified as DSIBs
andassociatedbucketstructureareasunder:

AdditionalCommon
EquityTier1
requirementasa
Bucket
Banks
percentageofRisk
WeightedAssets
(RWAs)
5

1.0%
4

0.8%
3
StateBankofIndia
0.6%
2

0.4%
1
ICICIBank
0.2%
The additional CET1 requirements will be applicable from April 1, 2016, in a
phased manner and would become fully effective from April 1, 2019. The
additional CET1 requirement will be in addition to the capital conservation
buffer.
Accordingly,SBI will now have to raise additional common equity at 0.8
percentofriskweighedassetswhileICICIwillhavetoraise0.2percent.

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