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Systematically Important Banks (SIBs)

Some banks are identified as systematically important and are subjected to higher capital requirements. When are banks termed as systematically important? What are the additional capital requirements for such banks? And which are the systematically important banks in India?

What are Systematically Important Banks (SIBs)?

Systematically Important Banks (SIBs) are perceived as banks that are ‘Too Big To Fail (TBTF)’. 

Why additional policy measures are required for SIBs?

The perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets. However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future. These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.

When was SIB framework introduced?

Basel Committee on Banking Supervision (BCBS) came out with a framework in November 2011 (since up-dated in July 2013) for identifying the Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs.

The framework was extended to Domestic Systemically Important Banks (D-SIBs) in October 2012.

BCBS methodology for identification of G-SIB vs RBI methodology for identification of D-SIB 

 

BCBS G-SIB identification methodologyRBI D-SIB identification methodology
Sample of banks75 largest global banks based on financial year end Basel III leverage ratio exposure measure. National supervisors have the discretion to add any bank in the sample apart from 75 largest banks.Banks having size (Basel III leverage ratio exposure measure) as a percentage of GDP equal to or more than 2%. Additionally, 5 largest foreign banks, based on their size, are also be added in the sample.
IndicatorsFive broad indicators –
1. Cross jurisdictional activity
2. Size
3. Interconnectedness
4. Substitutability
5. Complexity		Four broad indicators as mentioned in BCBS’s framework for D-SIBs are used –
1. Size
2. Interconnectedness
3. Substitutability
4. Complexity
Indicator weightsAll indicators given equal weight (20%) with a cap to substitutability category weight.Size given a weight of 40% and other three indicators given a weight of 20% each.
Sub-indicatorsThree sub-indicators for Complexity indicator –
1. Notional amount of OTC derivatives
2. Level 3 assets and
3. Trading and Available For Sales Securities		Level 3 assets for complexity indicator dropped and instead cross jurisdictional liabilities added.
Designating banks as SIBsBased on a range of indicators, a composite score of systemic importance for each bank in the sample is computed. The banks having systemic importance above a threshold are designated as G-SIBs.Based on a range of indicators, a composite score of systemic importance for each bank in the sample is computed. The banks having systemic importance above a threshold are designated as D-SIBs.

How are SIBs segregated?

  • SIBs are segregated into different 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. 
  • SIB in lower bucket attract lower capital charge and a SIB in higher bucket attract higher capital charge.

What is bucket-wise additional capital requirements for SIBs?

BucketAdditional CET1 requirement (as a percentage of risk weighted assets)

 

D-SIBG-SIB
5 (Empty)1.00%3.5%
40.80%2.5%
30.60%2%
20.40%1.5%
10.20%1%

  • The additional CET1 (Common Equity Tier 1) requirement is in addition to the capital conservation buffer.
  • The 5th bucket is kept empty, to take care of banks in case their systemic importance score increases in future beyond the 4th bucket. 
  • In the event of the 5th bucket getting populated, an additional empty (6th) bucket would be added.
  • An empty bucket with higher CET1 requirement incentivizes SIBs with higher scores not to increase their systemic importance in future.

When was D-SIBs framework implemented in India?

  • RBI had issued the framework for dealing with D-SIBs on July 22, 2014. 
  • As required under D-SIB framework, RBI has been disclosing the names of banks designated as D-SIBs starting from 2015. 
  • The additional Common Equity Tier 1 (CET1) requirement for D-SIBs was phased-in from April 01, 2016 and became fully effective from April 01, 2019. 
  • The D-SIBs framework was reviewed and revised on December 28, 2023.

What were the major revisions in the D-SIBs framework?

Based on the review of D-SIBs framework in December 2023, while there was no change in the selected indicators or their respective weights, some of the revisions to the methodology were as follows –

  • The data requirement under ‘Payments’ sub-indicator of ‘Substitutability’ indicator was revised from “Payments made in Indian Rupee (INR) using Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer (NEFT) systems” to –
    • Total value of Digital Payments made in INR (75% weightage)
    • Total volume of Digital Payments made in INR (25% weightage)
  • The computation of systemic importance scores, based on the end-March data of all the banks in the sample, would be performed annually in the months of August-October, and names of the banks classified as D-SIBs would be disclosed in the month of November every year. Accordingly, banks would be required to be in readiness to submit the required data to RBI by August 15 of each year.

Which are D-SIBs in India?

(Updated on November 13, 2024)

RBI has released the 2024 list of Domestic Systemically Important Banks (D-SIBs) based on the data collected from banks as on March 31, 2024. The list is as follows –

BucketBanksAdditional Common Equity Tier 1 requirement as a percentage of Risk Weighted Assets (RWAs)
5-1%
4State Bank of India0.80%
3-0.60%
2HDFC Bank0.40%
1
ICICI Bank
0.20%

RBI had announced SBI and ICICI Bank as D-SIBs in 2015 and 2016. Based on data collected from banks as on March 31, 2017, HDFC Bank was also classified as a D-SIB, along with SBI and ICICI Bank.

SBI and HDFC Bank had moved to higher buckets in 2023 – SBI shifted from bucket 3 to bucket 4 and HDFC Bank shifted from bucket 1 to bucket 2. For SBI and HDFC Bank, the higher CET1 requirements on account of the bucket increase will be effective from April 1, 2025. Hence, up to March 31, 2025, the additional CET1 applicable to SBI and HDFC Bank will be 0.60% and 0.20% respectively.


References

Reserve Bank of India. (2014, July 22). 'Framework for Dealing with Domestic Systemically Important Banks (D-SIBs)'. Retrieved from https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2861

Reserve Bank of India. (2014, July 22). 'RBI releases Framework for dealing with Domestic Systemically Important Banks (D-SIBs)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=31680

Reserve Bank of India. (2023, December 28). 'Domestic Systemically Important Bank (D-SIB) Framework - Review of the Assessment Methodology'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57015

Reserve Bank of India. (2023, December 28). 'Framework for Dealing with Domestic Systemically Important Banks (D-SIBs) - 2023'. Retrieved from https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=4362#F1

Reserve Bank of India. (2023, January 02). 'RBI releases 2022 list of Domestic Systemically Important Banks (D-SIBs)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=54979

Reserve Bank of India. (2023, December 28). 'RBI releases 2023 list of Domestic Systemically Important Banks (D-SIBs)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57006

Reserve Bank of India. (2024, November 13). 'RBI releases 2024 list of Domestic Systemically Important Banks (D-SIBs)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59088


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