RBI plans to de-risk 4-6 systemically important domestic banks

23 Jul 2014


The Reserve Bank of India (RBI) on Tuesday said it plans to fortify at least four-six `Domestic Systemically Important Banks' (D-SIB) with larger base capital and additional provisioning requirements, in view of the importance of these banks to the entire banking system and the national economy.

Since any failure of these banks could severely strain the entire banking system and affect the real economy, RBI plans to prescribe higher capital requirements and stricter provisioning norms for these banks.

While the RBI did not name the banks, it has already made 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.

Such 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 prescription for dealing with such big banks.

RBI will determine the relative composite systemic importance score of the banks based on a sample of banks chosen for computation. It will also prescribe a cut-off score beyond which banks will be considered as D-SIBs.

Based on their systemic importance scores in the ascending order, banks will be plotted into four different categories and will be required to have additional common equity Tier 1 capital requirement ranging from 0.20 per cent to 0.80 per cent of risk weighted assets, depending upon the bucket they are plotted into.

Based on the data as of 31 March 2013, it is expected that about 4 to 6 banks may be designated as D-SIBs under various buckets, RBI stated.

D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system.

The computation of systemic importance scores will be carried out at yearly intervals. RBI will disclose the names of the banks classified as D-SIBs in August every year starting from 2015.

The categorisation 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.

The Basel Committee on Banking Supervision (BCBS) came out with a framework in November 2011 for identifying the Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs.

The BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs).

''In case a foreign bank having branch presence in India is both a G-SIB and a DSIB in India, it has to maintain a capital surcharge in India at a rate which is the higher of the two,'' the central bank added.

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


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