What is a Systematically Important Bank?
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SIBs are perceived as certain big banks in the country/world. They enjoy a huge customer base and also engage in cross sector activities (insurance/pension). They are perceived as ‘Too Big to Fail (TBTF)’.
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As they command such a huge consumer base as well have NBFC subsidiary therefore they have expectation of government support at the time of distress
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Due to this perception these banks may indulge in reckless practices.
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There are two types of SIBs:
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Global SIBs; the identified by BCBS (BASEL Committee on Banking Supervision)
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Domestic SIBs; by central Bank of the country
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Domestic Systemically Important Banks(D-SIBs):
D-SIBs are banks that are Too Big To Fail(TBTF). According to RBI, banks become D-SIBs due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. Banks, whose assets exceed 2% of GDP are considered part of this group.
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Significance of D-SIBs:
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Failure of such banks will result into significant disruption to the essential banking services to banking system and the overall economy.
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D-SIB tag also indicates that in case of distress, the government is expected to support these banks.
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They are also subjected to higher levels of supervision so as to prevent disruption in financial services in the event of any failure.
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D-SIBS are required to maintain additional capital requirements as notified by the RBI.
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Why in news?
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RBI has retained SBI, ICICI and HDFC Bank in Domestically Systematically Important Banks (D-SIBs) list.
Why it is needed?
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Following the global financial crisis of 2008, it was observed that problems faced by certain large and highly interconnected financial institutions hampered orderly functioning of financial system, which in turn, negatively impacted real economy.
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As some of the banks are perceived as TBTF, they can lead to reckless practices on their part like increased risk-taking, reduction in its market discipline, creation of competitive distortions etc. because of expectation of government support them at time of distress. All this can increase probability of distress in future.
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Therefore, it is required recognition of these banks as SIBs and subjected to additional policy measures to deal with systemic risks and moral hazard issues posed by them. They are forced to have additional capital against financial emergency, so that taxpayer money not wasted in rescuing them during crisis.