RBI Press Release
dated 31st August 2015:-
“QUOTE”:
The Reserve Bank of India announced today the
designation of State Bank of India and ICICI Bank Ltd. as Domestic Systemically
Important Banks (D-SIBs).
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.
The D-SIB
Framework specifies a two-step process of identification of D-SIBs. In the
first step, the sample of banks to be assessed for systemic importance has to
be decided. The selection of banks in the sample for computation of SIS is
based on analysis of their size as a percentage of annual GDP.
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
Common Equity Tier 1 (CET1) requirements applicable to D-SIBs 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.
Further, as
mentioned in the D-SIB Framework, in case a foreign bank having branch presence
in India is a Global
Systemically Important Bank (G-SIB)
,
it has to maintain additional CET1 capital surcharge in India as applicable to
it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.
,
it has to maintain additional CET1 capital surcharge in India as applicable to
it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.
Sangeeta Das
Director
Director
“UNQUOTE”
Reserve Bank of India has
identified State Bank of India and ICICI Bank as systemically important
banks in India, requiring these lenders to keep aside additional capital
to cover risk.
Their capital
requirement rises by 0.6% and 0.2% respectively, but this may not have much
significance because banks in India in general maintain more than two to three
percentage points more capital than regulatory stipulation
The baking
regulator said the additional common equity tier 1 requirements for SBI and ICICI Bank
will be applicable from April 1, 2016 in a phased manner and would become fully
effective from April 1, 2019. This will be in addition to the capital
conservation buffer.
RBI Executive director
NS Vishwanathan said that Indian banks need to adhere to more stringent capital
requirements compared to their global counterparts under the new Basel III
framework because of the many gaps existing in the system.
What is a systemically important bank?
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 fulfil its financial
obligations.
Reasons as to why SBI and ICICI
Bank were declared systemically important?
The Reserve Bank of India (RBI) uses a methodology to determine
whether a bank is systemically important or not on the basis of its size,
interconnectedness, substitutability and complexity. Such banks are called
domestic-systemically important banks (D-SIB). RBI has now selected two banks namely
State Bank of India and ICICI bank as Domestic Systematically Important Banks (D-SIB)
. As per RBI , these two banks are too big to fall. But the fact is that these
two banks are vulnerable to more risk and they have more gross Non Performing
Assets (NPA) , one among public sector banks and another among private banks.
If RBI is able to unearth all hidden NPA and add them to existing declared NPA ,
these two big banks will be prone to
more risk than any other banks in their domain. We have seen in the past how
reputed IT company Satyam Computer managed to portray good picture of the
company in the balance sheet year after year. Later when fraud perpetuated by
Satyam was exposed by none other than Promoter , Government was caught unaware
and the most famous team of Auditors (PWC) also expressed helplessness . It was
only shareholders in the company who had to suffer the most. As regards ICICI
bank , RBI has little to say and GOI has no direct stake but investors have greater
stake in form of share participation. As far as SBI is concerned, RBI and GOI
has greater role and greater stake whereas people of India, too, have almost
considerably big stake. In both the cases , investors and depositors will
suffer the most if they fail or they face crisis even to little extent.
Factors
considered:
Size takes into account all exposures
(Loans, savings deposits, commissions from mutual fund businesses) of a bank.
According to RBI, “The impairment or failure of a bank of large size is more
likely to damage the confidence in the banking systems as a whole.”
SBI and ICICI
Bank’s total credit risk exposure was over Rs 30 lakh crore or around 30% of India’s
GDP. Secondly, 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. For instance, if a bank
that fulfilled the highest number RTGS transactions was to fail its effect on
the financial system would be relatively higher. SBI (along with its
subsidiaries) and ICICI Bank complete 23% of all RTGS transactions.
Lastly, if a bank has higher complexity
the cost and time taken to resolve its issues will higher. Among other things
complexity takes into account the size of international liabilities. The two
banks have a collective overseas exposure of Rs 5 lakh crore as of June 30.
Does this makes them ‘too big
to fail’ (TBTF), as the US puts it?
SIBs
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. However, the perceived expectation of government support
amplifies risk-taking, reduces market discipline, creates competitive
distortions, and increases the probability of distress in the future. These
considerations require that SIBs should be subjected to additional policy
measures to deal with the systemic risks and moral hazard issues posed by them.
Will SBI and ICICI Bank will be treated
at par to Citigroup and Bank of America in case of a crisis?
Citigroup and Bank of America were among the many banks – which gave rise to
the term TBTF – that had assumed too much risk in the absence of regulations. Also,
these risky assets were spread all over the world. Therefore, if these banks
were not bailed out — at a cost of $700 billion — the global financial system
would have faced an even graver crisis. After the crisis central banks and
governments, globally, adopted a stronger regulatory stance that could prevent
and foresee any such crises.
In October 20101, the Financial Stability
Board (FSB) recommended that all member countries needed to have in place a
framework to reduce risks attributable to Systemically Important Financial
Institutions (SIFIs) in their jurisdictions. The FSB asked the Basel Committee
on Banking Supervision (BCBS) to develop an assessment methodology comprising
both quantitative and qualitative indicators to assess the systemic importance
of Global SIFIs (G-SIFIs), along with an assessment of the extent of
going-concern loss absorbency capital which could be provided by various proposed
instruments. In response, BCBS came out with a framework in November, 2011
(since up-dated in July, 2013) for identifying the Global Systemically
Important Banks (G-SIBs) and the magnitude of additional loss absorbency
capital requirements applicable to these G-SIBs.
6. The BCBS is also considering proposals
such as large exposure restrictions and liquidity measures which are referred
to as “other prudential measures” in the FSB Recommendations and Time Lines.
The G20 leaders had asked the BCBS and FSB in November 2011 to extend the
G-SIBs framework to Domestic Systemically Important Banks (D-SIBs)
expeditiously.
Does India have such regulations?
Does India have such regulations?
Primarily these are
stipulated reserve requirements such as the cash reserve ratio/SLR etc. Also, there are
norms such as the globally-accepted Basel III that require banks to have a
certain amount of capital adequacy ratio, which determine how much shock a bank
can absorb.While these apply for all banks, SBI and ICICI Bank, which have been
identified as D-SIB, will have to maintain additional capital as a percentage
of its risk weighted assets.
This additional percentage is 0.6% for
SBI and 0.2% for ICICI Bank as mentioned in the press release of RBI above. The
two banks will have to implement this in a phased manner by April 1, 2019 or
face further restrictions. All of the above are however, preemptive measures.
What if these banks do fail?
RBI’s
wholly-owned subsidiary Deposit Insurance and Credit Guarantee Corporation
(DICGC) insures savings, fixed, current and recurring deposits with all
commercial up to a maximum of Rs 1,00,000, which means you will lose all your
savings above that amount.
Apart from the
personal impact, a bank failure will imply all other deposits with the bank
will be liquidated and RBI will take over the bank’s operation till it is
acquired by someone else. However, this is a very rare case and since the early
nineties no bank has failed in India as RBI has stepped in and effected a
merger.
Source:
-
https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2861
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