Global Systemically Important Banks (G-SIBs)

Global Systemically Important Banks (G-SIBs) are large, complex, and highly interconnected banking institutions whose failure could cause severe disruption to the global financial system. Their importance is determined not only by size but also by their extensive cross-border operations, interconnectedness with other financial institutions, complexity of activities, and limited substitutability of the services they provide. The concept of G-SIBs emerged strongly after the global financial crisis of 2008, which revealed the systemic risks posed by large international banks. In the context of banking and finance, G-SIBs are central to credit creation, payment and settlement systems, and global capital flows, while their relevance to the Indian economy has increased with India’s growing integration into global financial markets.

Concept and Background of G-SIBs

Global Systemically Important Banks are often described as institutions that are “too big to fail” at the international level. These banks perform critical financial functions such as large-scale corporate and sovereign lending, derivatives trading, clearing and settlement services, and foreign exchange operations. Due to their global presence and interconnected activities, distress in a G-SIB can quickly spread across financial markets and national boundaries, leading to financial contagion.
The identification and regulation of G-SIBs are guided by standards developed by the Basel Committee on Banking Supervision. Banks are assessed annually using indicators such as size, interconnectedness, complexity, substitutability, and cross-jurisdictional activity. Based on their systemic importance, banks are categorised into different buckets, each associated with an additional capital surcharge to enhance their ability to absorb losses.

Evolution after the Global Financial Crisis

The global financial crisis of 2008 exposed serious weaknesses in the international banking system. The collapse of major financial institutions demonstrated how inadequate capital buffers, excessive leverage, and weak risk management could destabilise entire economies. Governments were forced to provide large-scale bailouts, increasing public debt and economic instability.
In response, global regulators introduced a range of reforms aimed at strengthening the resilience of systemically important banks. These reforms included higher capital requirements, enhanced supervision, stress testing, and the development of recovery and resolution plans. The G-SIB framework was designed to reduce the probability of bank failure and to limit the impact of such failures on the broader economy and taxpayers.

Role of G-SIBs in Global Banking and Finance

In the global banking and financial system, G-SIBs function as key intermediaries facilitating international trade, investment, and financial market activity. They provide trade finance to exporters and importers, support multinational corporations, and maintain liquidity in global money, bond, and foreign exchange markets. Their advanced technological and financial infrastructure enables efficient payment, clearing, and settlement mechanisms.
Despite these benefits, G-SIBs also raise concerns related to market concentration and moral hazard. The expectation that governments may intervene to prevent their failure can encourage excessive risk-taking. As a result, G-SIBs are subject to stricter regulatory oversight, including higher capital buffers, liquidity requirements, and continuous supervisory monitoring.

Indian Banking System and Systemic Importance

India has a predominantly bank-led financial system, with commercial banks playing a central role in financial intermediation. Although no Indian bank is currently designated as a G-SIB, India has established a framework for identifying Domestic Systemically Important Banks (D-SIBs). This framework is implemented by the Reserve Bank of India to identify banks whose failure could pose significant risks to domestic financial stability.
Banks such as State Bank of India, HDFC Bank, and ICICI Bank are classified as D-SIBs due to their large asset base, extensive customer reach, and interconnectedness within the financial system. These banks are required to maintain additional capital buffers to reduce systemic risk and enhance resilience.

Linkages between G-SIBs and the Indian Economy

Although Indian banks are not part of the global G-SIB list, G-SIBs maintain significant linkages with the Indian economy. Global banks operate in India through branches, subsidiaries, and cross-border financial transactions. They are active in corporate lending, investment banking, foreign exchange markets, and capital market services.
These linkages provide several benefits to India, including access to international capital, advanced financial products, and global best practices in banking and risk management. G-SIBs also play an important role in facilitating foreign direct investment and portfolio investment, thereby supporting economic growth. However, these connections also expose India to external financial shocks originating in advanced economies.

Risks and Regulatory Challenges for India

The involvement of G-SIBs in Indian financial markets poses regulatory and macroeconomic challenges. Financial stress in a G-SIB’s home country can transmit to India through sudden capital outflows, exchange rate volatility, and tightening of global credit conditions. Such spillover effects have been observed during periods of global financial instability.
To address these risks, Indian regulators emphasise strong prudential norms for foreign banks operating in India. These include capital adequacy requirements, liquidity norms, and close supervisory coordination with international regulators. Such measures aim to protect domestic financial stability while allowing India to benefit from global financial integration.

Advantages and Criticism of the G-SIB Framework

The G-SIB framework has contributed to greater global financial stability by compelling large banks to hold higher levels of capital and improve governance standards. It reduces the likelihood of large-scale bank failures and enhances transparency in the global banking system. For emerging economies like India, these measures indirectly support stability by reducing the risk of global financial contagion.
However, critics argue that higher capital requirements may increase the cost of banking services and constrain credit growth. There is also concern that systemic risk may shift from regulated banks to less-regulated non-bank financial institutions. Additionally, accurately measuring systemic importance remains complex due to evolving financial structures and innovation.