The RBI today set out a framework for identifying and dealing with large banks, termed domestic systemically important banks or D-SIBs.
A size beyond 2 per cent of GDP will be one of the criteria for designating a bank as a D-SIB and it will be subject to higher capital requirements, according to the Reserve Bank of India.
The other three criteria for designating a bank as a D-SIB are: interconnectedness; lack of readily available substitutes or financial institution infrastructure; and complexity.
The RBI framework comes as a solution to the problems faced during the global financial crisis of 2008, when such large institutions hampered the functioning of the financial system, negatively impacting the real economy.
D-SIBs are perceived as banks that are ‘Too Big To Fail’. This perception creates an expectation of government support for these banks at the time of distress, the RBI said in its framework for dealing with D-SIBs.
The expectation of government support leads to risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress.
These considerations require that SIBs be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.
The RBI said banks having systemic importance above a threshold will be designated as D-SIBs.
These banks will be segregated into five buckets, based on their systemic importance scores and subject to loss absorbency capital surcharge, in a graded manner, depending on the buckets in which they are placed.
A D-SIB in a lower bucket (bucket 4) will attract a lower capital charge (of 0.20 per cent) and a D-SIB in a higher bucket (bucket 5 or empty bucket) will attract a higher capital charge (1 per cent).
An empty bucket with a higher common equity tier 1 requirement will incentivise D-SIBs with higher scores not to increase their systemic importance in future. In the event of the fifth bucket getting populated, an additional empty (sixth) bucket would be added with the same range and same differential additional capital.
The RBI said the higher capital 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.