HDFC Bank added to RBI’s list of `too-big-to-fail’ banks

The Reserve Bank of India has added HDFC Bank to the list of domestic systemically important bank (DSIB) under the bucketing structure identified last year. This is in addition to State Bank of India and ICICI Bank identified as DSIBs under the RBI rules in 2015.

The additional common equity Tier 1 (CET1) requirement for D-SIBs has already been phased-in from 1 April 2016 and will become fully effective from 1 April 2019. The additional CET1 requirement will be in addition to the capital conservation buffer.

''D-SIB surcharge for HDFC Bank will be applicable from April 1, 2018,'' the RBI said.

The Reserve Bank had issued the framework for dealing with D-SIBs on 22 July 2014, under which the central bank is required to disclose the names of banks designated as D-SIBs every year in August starting from 2015 and place these banks in appropriate buckets depending upon their systemic importance scores (SISs).

Based on the bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it. In case a foreign bank having branch presence in India is a global systemically important bank(G-SIB), it has to maintain additional CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate to its risk weighted assets (RWAs) in India.

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.

RBI said the latest update is based on the data collected from banks as on 31 March 2017.

Based on their systemic importance scores in ascending order, banks will be plotted into four different buckets and will be required to have additional common equity Tier 1 capital requirement ranging from 0.20 per cent to 0.80 per cent of risk weighted assets, depending upon the bucket they are plotted into. D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system.

It was observed during the global financial crisis that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy.

Government intervention was considered necessary to ensure financial stability in many jurisdictions. Cost of public sector intervention and consequential increase in moral hazard required that future regulatory policies should aim at reducing the probability of failure of SIBs and the impact of the failure of these banks.

SIBs are perceived as banks that are 'Too Big To Fail (TBTF)'. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets. ''However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.

These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them,'' the RBI said in a report.