- Why identify banks “Too big Fail”?
- Who will identify D-SIB?
- D-SIB in India
- Benefits of D-SIB norms?
- Limitations of D-SIB norms?
- 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.
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.
Bucket | Domestic Systematic important Bank (D-SIB) |
Additional Capital requirement |
---|---|---|
5 | None for now | X + (1.0% of risk weighed assets RWAs) |
4 | None for now | X + (0.8% of risk weighed assets RWAs) |
3 | SBI (D-SIB) | X + (0.6% of risk weighed assets RWAs) |
2 | None for now | X + (0.4% of risk weighed assets RWAs) |
1 | ICICI (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 bank | Suppose 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?
- 2013: Cobrapost sting operation caught ICICI indulged in money laundering and KYC-Violation, RBI had imposed Rs. 1 crore fine.
- 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.
- If such large banks behavior in prudent manner, it’ll prevent any national financial crisis in the first place.
- Even if financial crisis happens, SBI and ICICI will be able to run their operations, because of the additional capital.
- Government of India won’t have to use tax-payer’s money to rescue them.
Limitations of D-SIB norms?
- D-SIB mechanism alone not sufficient for preventing banking sector collapse, because apart from D-SIB, we must also control their “shadow bank” children.
- 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.
- 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.
- 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.
- 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)
- Has to maintain additional SLR and SLR
- Has to follow separate norms for priority sector lending.
- Has to invest additional money in compulsorily in G-Sec
- None of above
Q2. The concept of “Domestic Systemically Important Banks (D-SIB)” is the brain child of __.
- US federal reserve
- FSB
- Basel Committee on banking supervision
- Justice BN Srikrishna commission.
Q3. Consider following statements about Domestic Systemically Important Bank (D-SIB)
- A D-SIB is required to maintain two banking ombudsman per state.
- 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.
- Both A and B
- 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?
A respite after a long waiting
Do nyone hav idea about cse 2016 eligibility criteria,,,age limit. My dob is 25.07.84.will i be eligible to appar as general category female candidate?
Ny idea abt rbi grade b officer revised syllabus. How to prepare for it. Books and other study materials???
Join Target RBI 2015 group on Facebook. Mr. Susheel Ragade Ex- RBI manager also provides test series. He is the admin of this group.
thanks for your wonderful work .keep it up
What a relief to see your post!! Thankyou. :)
sir plz give detailed strategy of incoming rbi grade b exam
nice to see you back in economy article after a long time mrunal sir..please keep posed article time to time
anyone preparing for APFC?
hi all
can anyone tell where can i find ignou notes for history ?? do i need to buy it from somewhere or is it available online ?
thanks
i have modern india 1857-1964 ignou notes in pdf. are you lokking fot that only ?
sir, thank you. i m following your site for a year and aspirant for 2016 . u inspired me to go for upsc without coaching.
u r my dronacharya. but i was apprehensive when u stopped posting. thank you for coming back. thanks a lot sir.
with love and respect
Don’t LIE man Everyone is getting coaching in some form.HOW YOU KNOW ABOUT THIS WEBSITE?
ALL MOST ALL COACHING FACTORIES ADVICES THEIR STUDENTS TO “””FIRST GO THROUGH THIS-MRUNAL’S SITE,BEFORE STARTING YOUR PREPARATION” LIKE THAT. . .THAT IS Y U R HERE….
V PEOPLE R GETTING COACHING BUT IN OUTSIDE WORLD TELLING LIE THAT “I DON’T TAKE ANY COACHING & DOING SELF PREPARATION ONLY” !!!
SHAME
calm down girl
No discussions about CSP 2015???
Thank u Mrunal……..for a good article after a long wait :)
sir welcome , please provide the analysis of civil service prelims 2015 exam
Thankyou sir!!!
Sir, Glad to see your article.
Sir im totally depndent on u, when u becm inactive i get deviated , i cmplty lose my focus sir pls be regular!!!
Dear evry one dont hv lakhs to join those coaching shops!!!
welcome back sir ..please help us in mains 15 with your super quality articles ..
..thanks
Thank u sir…
what is FSBs position on implementation of SIB recommendation by economies especially the advanced economies. Does it have only an advisory role?
can ny1 post d history optional paper of uppsc 2014 and 2013…….need for answr writting practice
pcs-j 2015 {u.p} ques.how many women members were there in the indian constituent assembly ?
option a)10 ,b)12 ,c)13 ,d) 15
plz solve
official answer key is a) 10
Why RBI did not choose the option of increasing CRR or SLR for these D-SIB rather than classifying bucket system?
sir could you please give us a proper roadmap for economy for 2016?…pls sir..
सर हिंदी में भी आपके आर्टिकल पोस्ट करो ताकि हम हिंदी माध्यम वालो को फायदा हो……ras ke liye bhi kuch post karo plzzxxxxxx
Sir, Please upload pre. analysis…..
Thank u :)
I have a query regarding inflation- they say, inflation is now all time low, (or at least compared to previous times) the why onion prices are still so high?
Thank you sir.
sirji prelims analysis ?
i think it is a good artical . Domestic
Systemically Important
Banks – SBI deserve to be in list