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The Reserve Bank of India on Tuesday said Banks having size as a percentage of GDP equal to or more than 2 per cent will be designated as domestic systemically important banks (D-SIBs) and they will be subject to higher capital requirements.
Additionally, five largest foreign banks, based on their size, will also be added to the sample for identification of D-SIBs.
D-SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress, the RBI said in its framework for dealing with D-SIBs.
Due to this perception, these banks enjoy certain advantages in the funding markets. However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.
These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.
Due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity.
The RBI said banks having systemic importance above a threshold will be designated as D-SIBs. D-SIBs would be segregated into five different buckets based on their systemic importance scores, and subject to loss absorbency capital surcharge in a graded manner depending on the buckets, in which they are placed.
A D-SIB in lower bucket (bucket 4) will attract lower capital charge (of 0.20 per cent) and a D-SIB in higher bucket (bucket 5 or empty bucket) will attract higher capital charge (1 per cent).
An empty bucket with higher common equity tier 1 requirement will incentivize D-SIBs with higher scores not to increase their systemic importance in future. In the event of the fifth bucket getting populated, an additional empty (sixth) bucket would be added with same range and same differential additional CET1.
The RBI said the higher capital requirements applicable to D-SIBs will be applicable from April 1, 2016 in a phased manner and would become fully effective from April 1, 2019.
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