DOMESTIC SYSTEMATICALLY IMPORTANT BANKS

ChinmayaIAS Academy - Current Affairs March 17, 2023 GS3, Indian Economy Leave a comment 203 Views

The failure of Silicon Valley Bank and Signature Bank in the US raises questions on the safety of depositors’ wealth everywhere but such failures are unlikely in the Indian system.

What is the basis for the confidence in the resilience of Indian banks?

Domestic banks have a different balance sheet structure.
In India we don’t have a system where deposits are withdrawn in bulk quantities.
Household savings constitute a major part of bank deposits in India.
This is different from the US, where a large portion of bank deposits are from corporates.
A large chunk of Indian deposits is with public sector banks, and most of the rest is with very strong private sector lenders such as HDFC Bank, ICICI Bank, and Axis Bank.
In India, the approach of the regulator has generally been that depositors’ money should be protected at any cost.
The best example is the rescue of Yes Bank where a lot of liquidity support was provided.

What are domestic systemically important banks (D-SIB)?

Due to the way the D-SIBs become completely enmeshed in cross-jurisdictional activities, their complex financial structures, and the lack of other alternatives, they are considered systematically important.
A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic.
The government is expected to bail out these banks in times of economic distress to prevent widespread harm.
D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.
SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’, due to which these banks enjoy certain advantages in the funding markets.

Additional Common Equity:

The additional Common Equity Tier 1 (CET1) requirement for D-SIBs became fully effective from 2019.
The additional CET1 requirement was in addition to the capital conservation buffer.
It means that these banks have to earmark additional capital and provisions to safeguard their operations.

How are D-SIBs determined?

Since 2015, the RBI has been releasing the list of all D-SIBs.
In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 percent of the national GDP.
The banks are then further classified on the level of their importance across the five buckets.
Recently RBI has classified SBI, ICICI Bank, and HDFC Bank as D-SIBs.
ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three, with bucket five representing the most important D-SIBs.

Global Systematically Important Banks:

The Basel, Switzerland-based Financial Stability Board in consultation with the Basel Committee on Banking Supervision (BCBS) and Swiss national authorities has given a list of global systemically important banks (G-SIBs).
There are 30 G-SIBs currently.
No Indian bank is on the list.

The Basel accord:

Basel is a city in Switzerland.
It is the headquarters of Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
Currently there are 28 member nations including India.
Basel guidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS).
The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord.
The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

Basel I

In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1.
It focused almost entirely on credit risk.
It defined capital and structure of risk weights for banks.
The minimum capital requirement was fixed at 8% of risk weighted assets (RWA).
RWA means assets with different risk profiles.
For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral.
India adopted Basel 1 guidelines in 1999.

Basel II

In 2004, Basel II guidelines were published which were refined and reformed versions of Basel I accord.
The guidelines were based on three parameters/pillars:
Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets
Supervisory Review: Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks
Market Discipline: This need increased disclosure requirements.
Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank.
Basel II norms in India and overseas are yet to be fully implemented.

Basel III

In 2010, Basel III guidelines were released.
These guidelines were introduced in response to the financial crisis of 2008.
Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.

The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters: