What prompted RBI to classify some banks as systemically important?

In November 2011, the Basel Committee on Banking Supervision (BCBS) came out with a framework for identifying Global Systemically Important Banks (G-SIBs) and the magnitude of additional loss absorbency capital requirements applicable to these G-SIBs. The move was prompted by the global financial crisis of 2008, when some big financial institutions failed because of their high interconnectedness, impacting the entire financial system and the real economy.

The BCBS further required all member countries to have a regulatory framework to deal with Domestic Systemically Important Banks (D-SIBs). Safety of depositors' money and smooth working of the financial system are paramount for any central bank.

By their size and presence, some banks have a large share in the banking business in the country. So, trouble in their operations could put the system at risk - like payments not coming through, liquidity crunch and failing commitment to pay back deposits. This gives them "Too-big-to-fail" status.

IMPLICATIONS

• Besides setting aside higher capital, rules for counter-cyclical buffers may kick in earlier for D-SIBs than other banks
   
• Supervisory scrutiny will be more strict for them
   
• Concentration risks will have to be taken more seriously in doing business
   
• Strategic business shift to meet higher standards
   
• Rating agencies look at higher capital ratio as credit-positive for D-SIBs. But, it will not drastically alter the credit profile. The other financial health parameters are equally crucial for outlook and rating
   
• Aggressive business expansion - ramping up growth to grab market share or expand balance sheet, disregarding asset liability issues and credit quality risks might become a thing of the past
   
• The indicators used to arrive at whether a bank is systemically important or not are size, connectedness, lack of readily available substitutes and complexity. The selection was based on data collected from banks till March 31, 2015.