What is a domestic systemically important bank

Last week, the Reserve Bank of India (RBI) declared HDFC Bank Ltd to be a domestic systemically important bank (D-SIB). The other two such banks are State Bank of India (SBI) and ICICI Bank Ltd.

D-SIB means that the bank is too big to fail. According to the RBI, some banks become systemically important 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. The RBI stated that should such a bank fail, there would be significant disruption to the essential services they provide to the banking system and the overall economy.

The too-big-to-fail tag also indicates that in case of distress, the government is expected to support these banks. Due to this perception, these banks enjoy certain advantages in funding. It also means that these banks have a different set of policy measures regarding systemic risks and moral hazard issues.

As per the framework, from 2015, every August, the central bank has to disclose names of banks designated as D-SIB. It classifies the banks under five buckets depending on order of importance. ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three. Based on the bucket in which a D-SIB is, an additional common equity requirement applies. Banks in bucket one need to maintain a 0.15% incremental tier-I capital from April 2018. Banks in bucket three have to maintain an additional 0.45%. With bucket three being higher than bucket one, SBI has a higher additional requirement than ICICI Bank and HDFC Bank. All the banks under D-SIB are required to maintain higher share of risk-weighted assets as tier-I equity. According to the central bank, the additional capital requirement for these banks started in April 2016 in a phased manner and will be fully effective from April 2019.

The concept of D-SIB emerged after the global financial crisis. Whether your bank is in the D-SIB list or not, your fixed deposits are insured up to Rs1 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC). This means, in case of default, DICGC will pay you up to Rs1 lakh. Also, so far, there hasn’t been an incident where the government has not rescued depositors during a crisis in commercial banks. The government has also come to the rescue of large co-operative banks.