Two banks of the United States, the Silicon Valley Bank and Signature Bank, collapsed in the past one week. The third bank, First Republic Bank, has been saved from the brink of collapse by other lenders by giving it a $30 billion loan. As the financial markets across the world have faced the heat of the failure of these banks there are speculations how it could impact Indian banks.
Many are doubtful whether Indian banks also collapse amid the financial uncertainties in major economies. There could be a potential worry for small players in the banking sector but the top lenders like State Bank of India (SBI), ICICI Bank and HDFC Bank may not get affected by the impact of the financial turmoil in the US market. Wondering why? Read on to know more.
SBI, ICICI Bank and HDFC Bank come under D- SIBs category, as classified by the RBI. In January, the Reserve Bank of India issued the latest list of Domestic Systemically Important Banks (D-SIBs) for 2021.
RBI continues to classify SBI, ICICI Bank and HDFC Bank in the category of D-SIBs. But, what are D-SIBs? These are the banks which are so important for the country’s economy that the government cannot afford their collapse. Hence, D-SIBs are thought of as “Too Big to Fail” (TBTF) organisations.
The system of declaring banks as D-SIBs started after the 2008 financial crisis. From 2015 onwards, RBI has been bringing out the list of D-SIBs every year. Only SBI and ICICI Bank were on the D-SIBs list in 2015 and 2016. HDFC was also included in this list from 2017.
RBI gives Systematic Importance Score to all the banks of the country on the basis of their performance and their customer base. For a bank to be listed as a D-SIB, its assets must be more than 2% of the national GDP. D-SIBs are kept in five different buckets depending on the importance of the bank. Bucket five means the most important bank, while bucket one means the least important bank. Among the three banks that are D-SIBs, SBI is in Bucket Three, while HDFC and ICICI Bank are in Bucket One.
D-SIB banks also have to maintain an additional fund called Common Equity Tier 1 (CET1) capital. As per the latest RBI guidelines, SBI is required to keep 0.60 per cent of its Risk Weighted Assets (RWA) as CET1 capital, while ICICI and HDFC Bank are required to keep 0.20 per cent additional CET1 capital.
RBI continues to classify SBI, ICICI Bank and HDFC Bank in the category of D-SIBs. But, what are D-SIBs? These are the banks which are so important for the country's economy that the government cannot afford their collapse. Hence, D-SIBs are thought of as “Too Big to Fail” (TBTF) organisations.
Central banks worldwide began to look at 'too-big-to-fail' banking institutions closely after the 2008 global financial crisis. While ICICI Bank continues to be in the same bucketing structure as last year, SBI and HDFC Bank moved to higher buckets, the RBI said.
The usual three — State Bank of India among public sector banks and HDFC Bank and ICICI Bank among private banks — found mention in the list. Colloquially, such banks are reckoned as 'too big to fail' and certainly so because they represent over 50 per cent of the country's total banking system.
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