03 Jan Domestic systemically Important Bank: (D-SIBs)
Domestic systemically Important Bank: (D-SIBs)
This article covers “Daily current events “and the topic is ‘Domestic systemically important banks (D-SIBs)” which is in news, it covers “banking sector and NBFCs” In GS-3, and the following content has relevance for UPSC.
For prelims: about D-SIBs Banks
For mains: GS -3, Indian economy, banking sector
Why in news:
- SBI, ICICI Bank, and HDFC Bank are identified by RBI as Systemically Important Banks.
- According to the RBI circular, SBI, which is put in bucket 3, would need to make a provision of 0.60% toward increased Common Equity Tier 1(CET1) requirements as a percentage of Risk Weighted Assets, compared to ICICI Bank and HDFC Bank, which are placed in bucket 1.
- Systemically Important Banks (SIBs): Some banks acquire this status as a result of their scale, cross-border operations, complexity, lack of substitutability, and interconnection.
- The idea of SIBs being “Too Big To Fail (TBTF)” banks is prevalent. Since these banks are perceived to be TBTF, people anticipate government assistance when they are in trouble.
- The systemic dangers and moral hazard issues that SIBs present are addressed by additional governmental measures.
- The risk connected to the breakdown or collapse of a business, sector, financial institution, or entire economy is known as systemic risk.
- A moral hazard occurs when one party participates in a risky activity while aware that it is protected from the risk and the other party will bear the expense.
- The critical services that these banks provide to the banking system, as well as the broader economic activity, could be seriously disrupted by the uncontrolled failure of these banks.
Background of D-SIBs
- Global Systemically Important Banks (G-SIBs) have been identified since 2011 by the Financial Stability Board (FSB), in collaboration with the Basel Committee on Banking Supervision (BCBS) and national authorities.
- An international organization known as the Financial Stability Board (FSB) keeps an eye on the world financial system and offers suggestions. It was founded in 2009. A member in India.
- The evaluation and identification process for G-SIBs is published by BCBS.
- The principal international standard setter for the prudential regulation of banks is BCBS. Its member is RBI.
- The FSB started classifying Global Systemically Important Insurers (G-SIIs) in 2013 after consulting with national regulators, the International Association of Insurance Supervisors (IAIS), and the IAIS.
- IAIS, founded in 1994, is an organization of insurance supervisors and regulators from more than 200 nations, accounting for 97% of global insurance premiums. Membership is voluntary.
- The International Financial Services Centers Authority (IFSCRA) and the Insurance Regulatory and Development Authority of India (IRDAI) are its members.
Domestic Systemically Important Banks (D-SIBs)
- In October 2012, the BCBS published a final version of its framework for handling D-SIBs. The D-SIB approach focuses on how the domestic economy will be affected if banks experience trouble or fail.
- In contrast to the G-SIB framework, the D-SIB framework is founded on the evaluation made by the national authorities, who are best qualified to assess the effects of failure on the local financial system and the local economy.
- In 2014, the RBI released the guidelines for handling D-SIB. Starting in 2015, the Reserve Bank is required by the D-SIB framework to reveal the names of banks that have been designated as D-SIBs and classify those banks into the relevant buckets based on their Systemic Importance Scores (SISs).
- Size, connectivity, substitutability, and complexity are the indicators that are employed for evaluation.
- The additional Common Equity Tier 1 Capital (CET1) requirements for banks range from 0.20 to 0.80 percent of risk-weighted assets and are based on their systemic relevance scores, which are plotted into four buckets in descending order (RWA).
- As it absorbs losses as soon as they happen, CET1 is the greatest quality of regulatory capital. As a preventative step to safeguard the economy from a financial catastrophe, it is a capital measure that was imposed globally in 2014.
- RWA is used to correlate the minimum capital requirements for banks with the risk profile of the bank’s lending activity (and other assets).
If a foreign bank with branch locations in India is deemed to be a Global Systemically Important Bank (G-SIB), it is required to maintain additional CET1 capital surcharges in India that are commensurate to its Risk Weighted Assets (RWAs) in India.
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