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Business News/ Industry / Banking/  RBI to list four-six banks as too big to fail
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RBI to list four-six banks as too big to fail

RBI will start naming these Domestic Systemically Important Banks every August, starting 2015

The central bank added it would create four sub-categories of D-SIB lenders, each with different requirements for additional common equity tier 1 capital requirements that would range from 0.20% to 0.80% of risk weighted assets. Photo: Pradeep Gaur/MintPremium
The central bank added it would create four sub-categories of D-SIB lenders, each with different requirements for additional common equity tier 1 capital requirements that would range from 0.20% to 0.80% of risk weighted assets. Photo: Pradeep Gaur/Mint

Mumbai: The Reserve Bank of India (RBI) on Tuesday said four-six banks in the country can be termed as “Domestic Systemically Important Banks" (D-SIB), the failure of which can severely strain the entire banking system and affect the real economy.

The draft version of this framework was released by RBI on 2 December.

These banks will be “subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system," RBI said in its framework for dealing with such big banks.

The central bank did not name the banks in its framework, but RBI already has arrangements with regulators of other countries on international “supervisory colleges" where large Indian banks such as State Bank of India, ICICI Bank Ltd, Punjab National Bank, Bank of India, etc., are monitored on their cross-border activities.

RBI will start naming these D-SIBs every August, starting 2015.

The D-SIBs will also be required to maintain additional equity capital ranging from 0.2% to 0.8% of risk-weighted assets, based on how systemically important they are.

The categorization is part of the Basel III norms on risk supervision, which were put in place after the global credit crisis of 2008. The crisis showed that a handful of large, highly interconnected banks, once in stress, could lead to a system-wide collapse and may need to be bailed out with public money. The framework issued for Indian banks is a slightly modified version of the existing norms by Basel Committee on Banking Supervision.

To identify such systematically important banks, RBI will use indicators such as size, interconnectedness, substitutability and complexity. Banks having a size beyond 2% of gross domestic product will be considered to be part of this category.

While foreign banks have much smaller balance sheet sizes, they are “quite active in the derivatives market" and provide specialized services not easily available with domestic banks. “It is, therefore, appropriate to include a few large foreign banks also in the sample of banks to compute the systemic importance," the RBI said.

However, RBI emphasized that “size is a more important measure of systemic importance than any other indicator and, therefore, size indicator will be assigned more weight than the other indicators".

Size of a bank will be computed taking into account both on- and off-balance sheet items.

“Based on the data as on 31 March 2013, it is expected that about four-six banks may be designated as D-SIBs under various buckets," the central bank said.

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Published: 22 Jul 2014, 06:35 PM IST
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