Economy

HDFC added in "Too Big to Fail" list by RBI

HDFC added in

The Reserve Bank of India has added HDFC Bank to the list of domestic systemically important bank (DSIB) under the bucketing structure identified previous year.

Now HDFC also joined with SBI and ICICI bank which is already tagged as D-SIBS.

"In addition to the SBI (State Bank of India) and ICICI Bank, which continue to be identified as Domestic Systemically Important Banks (D-SIBs), the Reserve Bank of India has also identified HDFC Bank as a D-SIB, under the same bucketing structure as previous year", an RBI release said here. Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it.

After 2008 global financial crisis, the Financial Stability Board or FSB recommended that all member countries needed to have in place a framework to reduce risks attributable to Systemically Important Financial Institutions in their jurisdictions. This sample, as per RBI, excludes smaller banks as they "would be of lower systemic importance and burdening these banks with onerous data requirements on a regular basis may not be prudent".

According to the D-SIBs structure, released in August 2014, banks under bucket one will need to prolong an additional 0.15% of additional tier-I capital from April 2018, which will increase to 0.2% in the consecutive year. "The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity", the RBI stated. As such large banks have the potential to disrupt the banking system, government intervention was considered necessary to ensure financial stability.

SIBs are perceived as banks that are 'Too Big To Fail (TBTF)'. "This is because the entire perception of the bank should improve on account of the regulatory label of being a systemically important bank, creating an expectation of government support in times of financial distress". Due to this perception, these banks enjoy certain advantages in the funding markets.



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