[Banking] D-SIB: Domestic Systemically Important Banks- meaning, classification, capital norms, benefits, limitations

Economy140 Comments

India Yearbook
  1. Why identify banks “Too big Fail”?
  2. Who will identify D-SIB?
  3. D-SIB in India
  4. Benefits of D-SIB norms?
  5. Limitations of D-SIB norms?
  6. Mock questions

Why identify banks “Too big Fail”?

  • 2009: Financial stability board (FSB) was setup. It is an international body affiliated with G20. Purpose: Monitor Global financial system. HQ: Basel, Switzerland.
  • 2010: FSB observes following:
  • Each country has certain “big” banks with huge client base, commanding billions of dollars, run cross-border and cross-sector (insurance | pension etc) investment through their NBFCs. (Non-banking financial companies)
  • These NBFCs act as “shadow banks”, because while they carry bank like operations but not subject to bank like regulations.
  • If the parent banks fail, Government is forced to ‘rescue’ them with ‘bailout package’ to ensure that national economy doesn’t collapse and ordinary citizen-clients don’t suffer. E.g. Subprime crisis, US & UK Government had to spend billions of tax-payer money to rescue their large banks.
  • Consequently, these banks become confident they’re “too big to fail” so they will always be rescued by market-forces or the government, will continue to indulge in grey-areas and reckless practices.
  • Hence, we need to identify such systematically important banks (SIB) at Domestic and global level.
  • We must force them to have additional capital/backup against financial emergency, so that taxpayer money not wasted in rescuing them during crisis.
Who will identify D-SIB?
Type of SIBWho will identify them?
Global
Systematically important Bank
(G-SIB)
BASEL Committee on banking supervision
Domestic
Systemically Important Banks
(D-SIB)
  • Each country’s central bank e.g. RBI for India, People’s bank of China for China.
  • Each central bank free to decide the parameters for identifying their desi SIBs.

D-SIB in India

  • 2014: RBI issued guidelines for Domestic Systemically Important Banks (D-SIBs).
  • Each year in August, RBI will disclose the names of banks designated as D-SIBs, using two-step technical process that is not important for ordinary exams except may be for RBI Grade “B” office interviews.
  • Further, these D-SIBs are sub-classified into bucket number 1 to bucket number 5 depending on their size (as % of GDP). Higher the bucket number, more capital they’ve to maintain.
  • 2015: SBI (Bucket 3) and ICICI (bucket 1) declared as D-SIBs. List will be updated each year in August.

Domestic Systemically Important Banks (D-SIB)

Table not important for UPSC, but for banking exams
BucketDomestic
Systematic important Bank
(D-SIB)
Additional
Capital requirement
5None for nowX + (1.0% of risk weighed assets RWAs)
4None for nowX + (0.8% of risk weighed assets RWAs)
3SBI  (D-SIB)X + (0.6% of risk weighed assets RWAs)
2None for nowX + (0.4% of risk weighed assets RWAs)
1ICICI (D-SIB)X + (0.2% of risk weighed assets RWAs)
so if they had to set aside Rs.1 earlier, now they’ll have to set aside Rs.1.02
Ordinary bankSuppose they’ve to maintain  “X” crores in tier-1 common equity in BASEL norms
  • ICICI says they already maintain 12% above tier 1 so no problem for them to comply with this D-SIB game.
  • But, SBI says they’ll have difficulty in arranging this much capital and hoping Government of India will help.

Benefits of D-SIB norms?

  1. 2013: Cobrapost sting operation caught ICICI indulged in money laundering and KYC-Violation, RBI had imposed Rs. 1 crore fine.
  2. Now that ICICI is classified as a D-SIB, Rajan Bhai will put stringent supervision over it, this will prevent ICICI/SBI from indulging in any grey areas, knowing well what happens when anyone tries to play with Aag (fire), Paani (Water) and rajanbhai.
  3. If such large banks behavior in prudent manner, it’ll prevent any national financial crisis in the first place.
  4. Even if financial crisis happens, SBI and ICICI will be able to run their operations, because of the additional capital.
  5. Government of India won’t have to use tax-payer’s money to rescue them.

Limitations of D-SIB norms?

  1. D-SIB mechanism alone not sufficient for preventing banking sector collapse, because apart from D-SIB, we must also control their “shadow bank” children.
  2. UK introduced a “ring fencing” law i.e. banks need to strictly separate operations from the NBFCs owned by them. In India, although we’ve RBI-guidelines for this but much needs to be done, e.g. Implement Justice BN Srikrishna’s report for financial sector legislative reforms (FSLRC), create new single statutory bodies to have overall supervision of sharemarket-insurancemarket-commoditymarket-pensionmarket and so on.
  3. 2014: News reports hinted that RBI was going to list 6 banks as D-SIB (viz. SBI, PNB, Citi, Standard Chartered, ICICI and HDFC). But the official list released in 2015 contains only two banks. The other four (PNB, Citi, Standard Chartered and HDFC) are also ‘too big to fail’ and should have been included in this list.
  4. In other nations, D-SIBs are required to maintain upto 3.5% additional capital. In India, highest Is just 1% (for D-SIB in Bucket#5) So, RBI’s norms are not as stringent as in other countries.
  5. Counter argument: Each central bank free to decide formulas and parameters. Given Indian economy’s size and otherwise strict regulation of banking sector, the current formula is sufficient.

Mock questions

Q1. A Domestic Systemically Important Bank (D-SIB)

  1. Has to maintain additional SLR and SLR
  2. Has to follow separate norms for priority sector lending.
  3. Has to invest additional money in compulsorily in G-Sec
  4. None of above

Q2. The concept of “Domestic Systemically Important Banks (D-SIB)” is the brain child of __.

  1. US federal reserve
  2. FSB
  3. Basel Committee on banking supervision
  4. Justice BN Srikrishna commission.

Q3. Consider following statements about Domestic Systemically Important Bank (D-SIB)

  1. A D-SIB is required to maintain two banking ombudsman per state.
  2. The Chairman/CMD of a D-SIB will be selected and appointed by a Committee made up of RBI governor and representatives from Union Government.
  3. Both A and B
  4. Neither A nor B

Q4. Many Factual MCQs possible from “bucket” table of above article. They’re important for Banking exams but not for UPSC.

Mains-Descriptive Question: As such this is technical topic, so direct question seems unlikely in UPSC Mains but it becomes a fodder point in the larger generic /vague question about controlling / reforming the banking sector / financial sector.
Interview: What is D-SIB, what is Shadow bank, How do they pose challenge to an Economy, what steps are done at national and international level to control them? What more should be done in your opinion?

Mrunal recommends

  1. (free) NCERT, NIOS, TN-Books
  2. Environment by ShankarIAS
  3. Indian Polity M.Laxmikanth (Hindi | English)
  4. Art & Culture by Nitin Singhania (Hindi | English)
  5. Spectrum: Modern History (Hindi | English)
  6. Bipin Chandra: Post Independence
  7. Fast-track to Arithmetic Rajesh Verma
  8. MK Pandey’s Analytical Reasoning
  9. Disha’s Topicwise Paperset (Hindi | English)
  10. School Atlas
  11. Mains: Language papers
  1. (free) NCERT, NIOS, TN-Books 4 History,Geo,Sci
  2. Indian Polity M.Laxmikanth (Hindi | English)
  3. Spectrum: Modern History (Hindi | English)
  4. Maths: Quantam CAT Sarvesh Kumar
  5. Objective General English SP Bakshi
  6. Word Power made Easy -Norman Lowe
  7. Topic wise Solved Paperset by Disha


So far 140 Comments posted

  1. nks01

    Mrunal sir…i am one of your biggest fans…sir for 2016 aspirants can you publish a roadmap especially for GS 3…humble request…god bless you sir..please consider my request

  2. aamodha

    you’re just awesome !!

  3. MANONMANI

    Sir, I have RRB officer scale-1 grade interview on 19th November 2015. So Please send model interview questions and answers for that interview to my mail

  4. BRAJESH KUMAR

    Respected sir,
    Thank u very much for sharing ur knowledge on u-tube….sir i cant explain ur greatness in my word…ur video lacture help me a lot to learn economy..
    Whole of my life i will be thankful for ur kindness…
    May god give u every thing u want…

  5. harsh tiwary

    sir, i m trying to find BPSC mains exam study material basically for general studies

  6. leela patel

    Hello sir .i have an ibps po interview so please send latest banking sevices ,schemes ,n interviw ques and ans for that interviw of my email.thanks

  7. Preeti

    Hello sir .i have an ibps po interview so please send latest banking sevices ,schemes ,n interviw ques and ans for that interviw of my email.thanks

  8. Rashi

    hello sir. I have my Ibps po interview. pls send me the latest schemes and banking related and interview related questions to my email Id. Thank you.

  9. Anand T R

    thank u mrunal sir , for this article !

  10. Sucheta

    Sir I am Sucheta from leh appearing for civil services
    2016 exam.my husband is army officer and his posted in leh .no tuition,no guidance, doing self study only. Please send me how to work on CSAT aptitude ?

  11. harshal

    Sir i have my ibps po interview on 21 jan. Sir plz send me important topic and notes for that and if possible then plz provide some interview question and ans. Thanks sir

  12. vivek waghmare

    thank u mrunal sir..ur website helped me in understanding the syllabus ..i used to follow it ..great job ..no need to go for extra material..

  13. prashant

    hello sir. I have my Ibps po interview. please send me the latest schemes and banking related and interview related questions to my email Id. Thank you.

  14. SOURAV BHATTACHARJEE

    hello sir, please guide me about the questions on latest developments in banking industry required for technical field officer exam in banks. Thank you.

  15. Ravi

    You should start website in hindi midium because some not perfectly able in English.

  16. noni

    how to study current affairs ?plz sir help me .

  17. Sachin

    What are the answers to these mock mcqs? Anybody please help.
    Thanks in advance

  18. Susmita

    Can i download Mrunal sir’s economics ppt?? If yes plz provide me the link… I hv searched alot but unable to download it!!

  19. Sreeparna Das

    Where are the answers of the mock questions?

  20. Prabakaran

    The details of New initiatives in bank’s for the period from January 01, 2016 to till date by RBI GOVT may be forwarded please.

  21. Sam

    Yar brijesh band karo bakwas.sir ko jeene do yar

  22. Sandeep

    Sir, in this article about D-SIBs it is mentioned that if a “too big to fail” bank is to face trouble then the market forces or the government would help them out.
    Can you kindly tell me what kind of market forces would help the above mentioned banks during times of trouble?
    Because I can not think of any third party that would have enough resources to prop-up a failing bank other than the government.

  23. tushar pawar

    sir u r awesome…. aapke explanation on video lecture and also in text form help me to understand the concept of economy step by step thank u very much sir…

  24. Gaurav Meshram

    Sir I have my interview for IBPS PO please guide me what to do and how to prepare for the same. Please help me with the expected questions and what else to do. Eagerly waiting for your reply. It will be of great help sir.Thank you.

  25. Aditya thakur

    Sir my rrb scale 1 interview on 21 jan plz provide and gidue me

Write your message!