The Reserve Bank of India (RBI) on Tuesday released the framework for dealing with domestic systemically important banks (D-SIBs) — the equivalent of too-big-to-fail banks — names of which will be announced in August every year from 2015.
Based on the data as of March 31, 2013, RBI expects about four to six banks to be designated as D-SIBs under various buckets.
The central bank said during the recent global crisis, it was observed that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, affected the economy.
“The government’s intervention was considered necessary in many jurisdictions to ensure financial stability. Cost of public sector intervention and consequential increase in moral hazard require that future regulatory policies should aim at reducing the probability of failure of systemically important banks (SIBs) and the impact of the failure of these banks,” RBI said. The indicators which would be used for assessment of D-SIBs 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 as D-SIBs,” RBI added.
RBI also said that based on their systemic importance scores in ascending order, banks will be plotted into four different buckets and will be required to have additional common equity tier 1 capital requirement ranging from 0.20% to 0.80% of risk-weighted assets, depending upon the bucket they are plotted into.
“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 central bank said.