Systemically Important Banks Case Study

Introduction

A few banks assume systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness. The failure of these banks can cause significant disruption to the essential services provided by the banking system, and also to the overall economic activity. These banks are Systemically Important Banks (SIBs) as their continued functioning is critical for the uninterrupted availability of essential banking services to the real economy.

Lessons from recent financial crisis

During the recent financial crisis, it was seen that problems faced by large and highly interconnected financial institutions hampered the functioning of the financial system, which in turn, harmed the

The FSB asked the Basel Committee on Banking Supervision (BCBS) to develop an assessment methodology comprising both quantitative and qualitative indicators to assess the systemic importance of Global SIFIs (G-SIFIs), along with an assessment of the extent of going-concern loss absorbency which could be provided by various proposed instruments.

State Bank of India (SBI) and ICICI Bank Ltd were designated as SIBs by the RBI. Domestic Systemically Important Banks (D-SIBs), meaning their collapse could have a cascading impact on the entire financial system and the economy.

The designation effectively means SBI and ICICI Bank, the nation’s biggest public sector and private sector banks respectively, are too big to fail or that their failure would have to be prevented at any cost to prevent the calamitous effects it would otherwise have.

SBI and ICICI have been so designated on the basis of a systemic importance score, arrived at after an analysis of the banks’ size as a percentage of annual gross domestic product (GDP). Banks with assets that exceed 2% of GDP will be considered to be part of this class of lenders.

SBI’s loan book was worth Rs.12.8 trillion and ICICI’s loan book was close to Rs.4 trillion. SBI accounts for 16.3% of the total market

This means that SBI and ICICI are in a different level in terms of importance to the financial system.

SBI’s gross bad loans, at Rs.56,420.77 crore ,18% of the combined sticky assets in the banking system. ICICI Bank’s gross non-performing assets (NPAs) are 5% of the total industry bad loans of Rs.3.2 trillion.

SBI falls in bucket three and ICICI Bank is in bucket one. SBI being in the higher bucket number is more systematically important than ICICI. Banks which fall in the fourth and the highest bucket will need to maintain an additional 0.8% of their risk weighted assets as common equity Tier-1.Banks in the third, second and first buckets will need to maintain an additional 0.6%, 0.4% and 0.2% of additional Tier-I capital respectively to maintain buffers they hold so that it balances out the higher risk they pose to the financial system.

ICICI and SBI will be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial