A brief on DOMESTICALLY SYSTEMICALLY IMPORTANT BANKS

The Reserve Bank of India announced State Bank of India and ICICI Bank Ltd as Domestic Systemically Important Banks (D-SIBs) & subjected them to higher levels of supervision to prevent disruption to financial services in event of any failure. To understand this better, lets discuss this in detail. 

What is a systemically important bank meaning is?

Systemically important bank or a bank that is ‘too big to fail’, is one whose failure will have nationwide or worldwide repercussions. A bank failure is a scenario in which the bank or financial institution is unable to pay its depositors or fulfill its financial obligations.

Systemically important banks are perceived as banks that are 'Too Big To Fail (TBTF)'. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets.

Why RBI choose these banks as DSIBs?

Primarily because of their size. The RBI uses a methodology to determine whether a bank is systemically important or not on the basis of its size, inter-connectedness, substitutability and complexity. Such banks have been termed as domestic-systemically important banks (D-SIB).

Wait a second, what do these factors take into account?

Lets consider these factors in detail..

• Size takes into account all exposures (Loans, savings deposits, commissions from mutual fund businesses) of a bank.A
• A bank is deemed more interconnected if it has borrowed or lent more money from other banks or financial institutions.
• Sustainability is a financial infrastructure indicator which determines if the services provided by the bank are easily replaceable or not. 
• If a bank has higher complexity the cost and time taken to resolve its issues will higher. 

Based on these factors, RBI have choose them as DSIBs.

Framework for DSIBs

The Reserve Bank had issued the Framework for dealing with Domestic Systemically Important Banks (D-SIBs) on July 22, 2014. The D-SIB Framework requires the Reserve Bank to disclose the names of banks designated as D-SIBs every year in August starting from August 2015. 

The Framework also requires that D-SIBs may be placed in four buckets depending upon their Systemic Importance Scores (SISs). 

Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it, as mentioned in the D-SIB Framework.

Based on the methodology provided in the D-SIB Framework and data collected from banks as on March 31, 2015, the banks identified as D-SIBs and associated bucket structure are as under:

Bucket	Banks	Additional Common Equity Tier 1 requirement as a percentage of Risk Weighted Assets (RWAs)
5	-	1.0%
4	-	0.8%
3	State Bank of India	0.6%
2	-	0.4%
1	ICICI Bank	0.2%

The additional CET1 requirements will be applicable from April 1, 2016, in a phased manner and would become fully effective from April 1, 2019. The additional CET1 requirement will be in addition to the capital conservation buffer.

Accordingly,SBI will now have to raise additional common equity at 0.8 percent of risk weighed assets while ICICI will have to raise 0.2 percent.