RBI to list banks that can hit the system

To disclose names by Aug 2015; foreign banks to be covered too

The Reserve Bank of India (RBI) has initiated a framework to identify systemically important banks operating in India. It plans to identify these and announce their names by August 2015.

The move was prompted by the recent financial crisis, when it was observed problems faced by certain large and highly interconnected financial institutions affected the orderly functioning of the financial system which, in turn, hit the real economy.

The central bank has said institutions considered too big to fail pose moral hazard issues, as perceived expectations of government support amplify risk-taking, reduce market discipline, create competitive distortions and increase the probability of distress.

The central bank has released a discussion paper for the framework to deal with domestic systemically important banks and has sought feedback from all stakeholders.

Banks whose balance sheets, as percentage of gross domestic product, exceed two per cent will be selected in the sample of banks. Foreign banks operating in India have smaller balance sheets. However, since foreign banks are active in the derivatives market and, therefore, specialised services provided by these banks might not be easily substituted by domestic banks, RBI has proposed to include a few large foreign banks in the sample list to consider their systemic importance.

The indicators to be used to assess systemic importance are size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen, a relative composite systemic importance score of the banks will be computed and RBI will determine a cut-off score, beyond which banks will be considered D-SIBs. “Based on their systemic importance scores, banks will be plotted into different buckets. SIBs (systemically important banks) will be required to have an additional common equity tier-I capital requirement ranging from 0.2 per cent to 0.8 per cent of risk-weighted assets,” RBI said.

These entities will also be subjected to differentiated supervisory requirements and more supervision, based on the risks they pose to the financial system. Computation of systemic importance scores will be carried out at annual intervals.

SYSTEMICALLY IMPORTANT

* The move was prompted by the recent financial crisis, when it was observed problems faced by certain large and highly interconnected financial institutions affected the orderly functioning of the financial system which, in turn, hit the real economy

* RBI has said institutions considered too big to fail pose moral hazard issues, as perceived expectations of government support amplify risk-taking, reduce market discipline, create competitive distortions and increase the probability of distress