Economy

RBI includes HDFC Bank in 'too big to fail' list

RBI includes HDFC Bank in 'too big to fail' list”

RBI today included HDFC Bank in the list of "too big to fail" lenders, referred to as D-SIB or domestic systemically important bank.

RBI categorises such banks as Domestic Systemically Important Banks (D-SIBs). HDFC Bank, the second-biggest Indian lender by assets, joins top lender SBI and ICICI Bank in the list referred to as D-SIB or domestic systemically important bank. The other banks on the list are the two largest lenders - State Bank of India (SBI) and ICICI Bank. RBI, in its framework for dealing with D-SIBs, describes them as "banks [that] assume systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness".

DSIB banks are required to set aside additional common equity capital in a phased manner.

How does RBI define "too big to fail" banks?

Banks which act as biggest lenders, take part in all types of financial activities like home loans, auto loans, educational loans, etc. which brings development in both people's life and nation are considered as D-SIB.

Based on the methodology provided in the D-SIB framework and data collected from banks as on 31 March 2015 and 31 March 2016, respectively, the Reserve Bank had announced State Bank of India and ICICI Bank Ltd.as D-SIBs on 31 August 2015 and 25 August 2016, respectively. "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. The banking regulator prescribes higher capital requirements - in terms of additional Common Equity Tier 1 (CET 1) capital - for such entities.

The RBI says that SIBs are perceived as banks that are "Too Big To Fail" (TBTF). These banks are subject to more rigorous regulation and capital requirement. The perception alo helps these banks in the funding markets and bring advantage for them.

Apart from protection from the RBI in the times of distress, the D-SIBs will be subjected to higher levels of supervision so as to prevent disruption of financial services in the event of any failure. However, the RBI notes, perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.



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