Basel creates a new breed of Banks - Domestic Systematically Important Banks (D-SIB)

Basel released its consultative document on framework for dealing with domestic systemically important banks. This is open for comments till 1 August 2012.

Essentially, the foundation of this framework is similar to the identification of Globally Systematically important Bank (G-SIB). G-SIB are those banks that are considered to have a significant impact on global banking system when they fail. In other words, these are Banks that are considered so large or “Too big to Fail”, that when they do fail, they are likely to have major consequences including failed economies of other countries.

Basel now believes that there may be Banks, which are not globally significant, but on a domestic level, could have local repercussions. To address this, Basel recommends that local Authorities or regulators introduce an assessment framework to identify D-SIB and then require these Banks to meet the higher loss absorbency (HLA) requirement for D-SIBs. HLA refers to higher loss absorbency relative to the Basel III requirements for internationally active banks.

For domestic banks that are not internationally active, HLA is relative to requirements for domestic banks. In simpler terms, HLA is the additional capital or other measures that D-SIB would need to take to ensure that it can absorb greater shocks and losses.

While RBI is working on this framework that needs to be implemented from Jan 2016, it would be interesting to know which Indian Banks might qualify as D-SIB. Riskpro would like to know from you, which Banks you consider might fit the criteria. Please send emails to manoj.jain@riskpro.in and we will share your responses with other users.

In our opinion, State Bank of India is definitely a candidate for D-SIB. One cannot imagine the collapse of SBI and if it does collapse, one can’t visualise the consequences and impact on Indian Economy. Similarly, there are a lot of smaller Banking institutions, which at a group level are considered “Financial Conglomerate” by RBI. Examples of these might be HDFC Bank, ICICI Bank, Kotak Mahindra Bank etc. Although the Banks by themselves may not be systematically important, the financial transactions across the whole group are so complex and inter linked that these are good candidates for D-SIB.

Take for example a Bank that also has Insurance, Broking, AMC and other financing subsidiaries. There is so much of consumer interaction through this group that Bank entity is just a small segment of the wider economic impact.

Anyway, to conclude, we request users to put their thoughts on the consultative document which is available at the following link and email us with responses at manoj.jain@riskpro.in

http://www.bis.org/publ/bcbs224.pdf

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