Domestic Systemically Important Banks (D-SIBs)

“Systemically Important Banks” are those banks whose failure could cause significant disruption to the financial system and economy due to their size, interconnectedness, and importance. In simpler terms, these banks are “Too Big To Fail.” Globally, some banks are designated as G-SIBs (Global SIFIs) by international bodies. Within India, the RBI designates Domestic Systemically Important Banks (D-SIBs).

Framework in India

RBI introduced the D-SIB framework in 2014. Banks are assessed based on criteria like:

• Size: (Total assets as a percentage of India’s GDP – the larger this ratio, the more impact a bank’s distress could have).
• Interconnectedness: (How linked the bank is with other financial institutions – e.g., interbank exposures).
• Substitutability: (If the bank provides critical services that are hard to quickly replace by others – e.g., clearing operations).
• Complexity: (Complex financial structures or cross-jurisdictional operations can complicate resolution).

RBI assigns each bank a score from these parameters and those above certain threshold scores are declared D-SIBs.

Bucket Classification and Additional Capital

D-SIBs are plotted into different “buckets” based on their systemic importance score:

• The more systemically important, the higher the bucket (Bucket 1 being least among SIBs and Bucket 5 would be highest, though in India we currently have up to Bucket 3).
• Each bucket corresponds to an extra capital requirement called Additional Common Equity Tier-1 (CET1) buffer. In India:
  • Bucket 1 banks must maintain +0.20% CET1 above normal requirements.
  • Bucket 2 would be +0.40% (currently no bank assigned Bucket 2).
  • Bucket 3 is +0.60%.

This capital buffer is on top of the standard capital conservation buffers and other regulatory minima. It is essentially to ensure higher loss-absorbing capacity for these “too big to fail” entities.

Identified D-SIBs

Since RBI began the assessment:

• In 2015, RBI announced the first D-SIBs: State Bank of India (SBI) and ICICI Bank.
• In 2017, HDFC Bank was also added to the D-SIB list as it had grown significantly.

These three banks have remained on the D-SIB list every year since. No other bank has yet met the criteria to be added. For instance, other large banks like Punjab National Bank, Bank of Baroda, or Axis Bank, while big, are still not as large or as interconnected on the metrics used (though if these banks grow via mergers or otherwise, they could be considered in the future).

Among these:

• SBI is classified in the highest bucket (Bucket 3) given its dominant size (it’s by far India’s largest bank). SBI must maintain an extra 0.6% CET1 capital.
• ICICI Bank and HDFC Bank are in Bucket 1, requiring an extra 0.2% CET1.

The RBI updates and publishes the list of D-SIBs annually (usually around September, based on data of the previous fiscal year). Up to now, it’s consistently been SBI, ICICI, HDFC Bank.

Implications for D-SIBS

• Higher Resilience: The extra capital means these banks are cushioned better against potential losses, reducing likelihood of failure.
• Closer Supervision: RBI keeps a very close eye on D-SIBs through more frequent and intensive supervision. These banks also are required to have detailed internal contingency and recovery plans.
• Market Perception: Being a D-SIB signals strength and importance; depositors and investors perceive these banks as having implicit government backing.

Indeed, authorities are expected to support a D-SIB rather than let it fail uncontrollably, because of systemic fallout. (For example, when Yes Bank was on the brink in 2020, even though it wasn’t a D-SIB, regulators orchestrated a rescue. For a true D-SIB, one can imagine even stronger steps would be taken to prevent collapse.)

It’s worth noting that foreign banks operating in India can be systemically important globally (e.g., Citi or HSBC as G-SIBs) but in India’s context their presence is not huge enough to be D-SIBs domestically.