Domestic-Systemically Important Banks (D-SIBs) will have to maintain additional common equity Tier 1 capital ranging from 0.20 per cent to 0.80 per cent of their risk-weighted assets, according to draft framework for dealing with such banks.
Common equity tier (CET) 1 capital includes common shares; share premium resulting from the issue of instruments, including CET 1; and retained earnings.
Risk-weighted assets means a bank’s assets or off-balance-sheet exposures are weighted according to risk The higher loss absorbency, met through CET 1 capital, is required as D-SIBs assume systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness.
The disorderly failure of these banks has the propensity to cause significant disruption to the essential services provided by the banking system and, in turn, to the overall economic activity.
These banks are considered D-SIBs as their continued functioning is critical for the uninterrupted availability of essential banking services to the real economy.
The process of assessment of SIBs will be a two-step process. First, the sample of banks to be assessed for their systemic importance will be decided.
Selection of banks
The banks having a size of beyond 2 per cent of GDP will be selected in the sample of banks. A few large foreign banks would also be included in the sample of banks to compute the systemic importance.
Once the sample of banks is selected, detailed study to compute their systemic importance could be initiated.
Based on a range of indicators, a composite score of systemic importance for each bank in the sample will be computed. The banks having systemic importance above a threshold will be designated as D-SIBs.
These would then be segregated into 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 will attract lower capital charge and a D-SIB in higher bucket will attract higher capital charge.