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RBI categorises IDBI Bank as Private Sector Bank; SBI, ICICI and HDFC remain Systemically Important Banks

RBI categorises IDBI Bank as Private Sector Bank; SBI, ICICI and HDFC remain Systemically Important Banks

The Reserve Bank of India (RBI) on 14 March 2019 named State Bank of India (SBI), ICICI Bank and HDFC Bank as Domestic Systemically Important Banks (D-SIBs), which in other words mean banks that are too big to fail.

What is Domestic Systemically Important Banks (D-SIBs)?

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.

Why they are important?

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.

Why RBI categorized these banks?

It was observed during the global financial crisis that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy.

Government intervention was considered necessary to ensure financial stability in many jurisdictions.

Cost of public sector intervention and consequential increase in moral hazard required that future regulatory policies should aim at reducing the probability of failure of SIBs and the impact of the failure of these banks.

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