RBI prescribes capital buffer for `systemically important' banks

The Reserve Bank of India (RBI) has prescribed additional safeguards for systemically important domestic banks - the Indian equivalent of America's `Too Big to Fail' banks - such as increased capital requirements by 2016 and subjecting them to greater supervision.

Domestic Systemically Important Banks (D-SIBs) will be required to have additional common equity Tier 1 capital ranging from 0.20 per cent to 0.80 per cent of their risk weighted assets. 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 draft framework released on RBI's web site today discusses the methodology to be adopted for identifying the D-SIBs and proposes regulatory / supervisory policies which D-SIBs would be subjected to.

The assessment methodology adopted by RBI is primarily based on the Basel Committee on Banking Supervision (BCBS) methodology for identifying the global systemically important banks (G-SIBs) with suitable modifications to capture domestic importance of a bank.

The indicators which would be used for assessment are: size, interconnectedness, substitutability and complexity.

Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed. RBI will determine a cut-off score beyond which banks will be considered D-SIBs.

Based on their systemic importance scores, banks will be plotted into different buckets.

The computation of systemic importance scores will be carried out at yearly intervals, RBI said.

The decision to raise capital requirements of major banks comes in the wake of an increase in banks' non-performing assets amidst a deceleration of economic growth.

Banking system in the country is burdened with rising levels of stressed loans, of $100 billion, or about 10 per cent of the total, categorised as bad or restructured.

The RBI released a draft of the new guidelines late on Monday, the same day as it issued proposals for counter-cyclical buffers, which would require banks to build reserves during periods of stability in order to weather more difficult times.

RBI has asked banks to send responses to its proposals by 31 December.