Important Details About Domestic Systematically Important Banks (DSIB)

Domestic Systematic Important Banks

• 2009: Financial stability board (FSB) was setup. It is an international body affiliated with G20. Purpose: Monitor Global financial system. HQ: Basel, Switzerland. 
•   2010: FSB observes following.Each country has certain “big” banks with huge client base, commanding billions of dollars, run cross-border and cross-sector (insurance | pension etc) investment through their NBFCs. (Non-banking financial companies)

·    These NBFCs act as “shadow banks”, because while they carry bank like operations but not subject to bank like regulations.

·      If the parent banks fail, Government is forced to ‘rescue’ them with ‘bailout package’ to ensure that national economy doesn’t collapse and ordinary citizen-clients don’t suffer. E.g. Subprime crisis, US & UK Government had to spend billions of tax-payer money to rescue their large banks.

·    Consequently, these banks become confident they’re “too big to fail” so they will always be rescued by market-forces or the government, will continue to indulge in grey-areas and reckless practices.

·    Hence, we need to identify such systematically important banks (SIB) at Domestic and global level.

Type of SIB	Who will identify them?
Global Systematically important Bank (G-SIB)	BASEL Committee on banking supervision
Domestic Systemically Important Banks (D-SIB)	·         Each country’s central bank e.g. RBI for India, People’s bank of China for China. ·         Each central bank free to decide the parameters for identifying their desi SIBs.

D-SIB in India

2014: RBI issued guidelines for Domestic Systemically Important Banks (D-SIBs).

• Each year in August, RBI will disclose the names of banks designated as D-SIBs, using two-step technical process that is not important for ordinary exams except may be for RBI Grade “B” office interviews.
• Further, these D-SIBs are sub-classified into bucket number 1 to bucket number 5 depending on their size (as % of GDP). Higher the bucket number, more capital they’ve to maintain.
• 2015: SBI (Bucket 3) and ICICI (bucket 1) declared as D-SIBs. List will be updated each year in August.

Bucket	Domestic Systematic important Bank (D-SIB)	Additional Capital requirement
5	None for now	X + (1.0% of risk weighed assets RWAs)
4	None for now	X + (0.8% of risk weighed assets RWAs)
3	SBI  (D-SIB)	X + (0.6% of risk weighed assets RWAs)
2	None for now	X + (0.4% of risk weighed assets RWAs)
1	ICICI (D-SIB)	X + (0.2% of risk weighed assets RWAs) so if they had to set aside Rs.1 earlier, now they’ll have to set aside Rs.1.02
—	Ordinary bank	Suppose they’ve to maintain  “X” crores in tier-1 common equity in BASEL norms

·      ICICI says they already maintain 12% above tier 1 so no problem for them to comply with this D-SIB game.

Benefits of D-SIB norms?

1.      Stringent Supervision

2.      If such large banks behavior in prudent manner, it’ll prevent any national financial crisis in the first place.

3.      Even if financial crisis happens, SBI and ICICI will be able to run their operations, because of the additional capital.

4.      Government of India won’t have to use tax-payer’s money to rescue them.

Limitations of D-SIB norms?

1.      D-SIB mechanism alone not sufficient for preventing banking sector collapse, because apart from D-SIB, we must also control their “shadow bank” children.

2.      UK introduced a “ring fencing” law i.e. banks need to strictly separate operations from the NBFCs owned by them. In India, although we’ve RBI-guidelines for this but much needs to be done, e.g. Implement Justice BN Srikrishna’s report for financial sector legislative reforms (FSLRC), create new single statutory bodies to have overall supervision of sharemarket-insurance market-commodity market-pension market and so on.

3.      In other nations, D-SIBs are required to maintain upto 3.5% additional capital. In India, highest Is just 1% (for D-SIB in Bucket#5) So, RBI’s norms are not as stringent as in other countries.