Bank that are too big to fall

Last Updated17/03/2023

India remained a safe haven during the global financial crisis triggered by the collapse of investment bank Lehman Brothers in 2008, with domestic banks, backed by sound regulatory practices, showing strength and resilience.
Recently, Indian banks remained unaffected by the failure of Silicon Valley Bank (SVB) and Signature Bank in the US last week, despite the global interconnectedness in the financial sector.

SVB-like failure is unlikely in India as domestic banks have a different balance sheet structure.
A large chunk of Indian deposits is with public sector banks, and most of the rest is with very strong private sector lenders such as HDFC Bank, ICICI Bank, and Axis Bank.
Customers need not worry about their savings, the banker said, adding the government has always stepped in when banks have faced difficulties.
In India, the approach of the regulator has generally been that depositors’ money should be protected at any cost.
The best example is the rescue of Yes Bank where a lot of liquidity support was provided.

RBI has classified SBI, ICICI Bank, and HDFC Bank as D-SIBs.
It means that these banks have to earmark additional capital and provisions to safeguard their operations.
Under the D-SIB framework announced by RBI, the central bank was required to disclose the names of banks designated as D-SIBs, and to place them in appropriate buckets depending upon their Systemic Importance Scores (SISs).
At global level, The Basel, Switzerland-based Financial Stability Board (FSB), an initiative of G20 nations, has identified, in consultation with the Basel Committee on Banking Supervision (BCBS) and Swiss national authorities, a list of global systemically important banks (G-SIBs).
There are 30 G-SIBs currently, including JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank, and Goldman Sachs. No Indian bank is on the list.

Banks are selected for computation of systemic importance based on an analysis of their size (based on Basel-III Leverage Ratio Exposure Measure) as a percentage of GDP.
Banks having a size beyond 2% of GDP will be selected in the sample.
A detailed study to compute their systemic importance is initiated.
Based on a range of indicators, a composite score of systemic importance is computed for each bank.
Banks that have a systemic importance above a certain threshold are designated as D-SIBs.
Next, the D-SIBs are segregated into buckets based on their systemic importance scores, and subjected to a graded loss absorbency capital surcharge, depending on the buckets in which they are placed.
A D-SIB in the lower bucket will attract a lower capital charge, and a D-SIB in the higher bucket will attract a higher capital charge.

During the 2008 crisis, problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the global financial system, which negatively impacted the real economy.
Government intervention was considered necessary to ensure financial stability in many jurisdictions.
The FSB recommended that all member countries should put in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions.
SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’, due to which these banks enjoy certain advantages in the funding markets.
However, this perception creates an expectation of government support at times of distress, which encourages risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.
While the Basel-III Norms prescribe a capital adequacy ratio (CAR) of 8%, the RBI has been more cautious and mandated a CAR of 9% for scheduled commercial banks and 12% for public sector banks.

The failure of a large bank anywhere can have a contagion effect around the world.
The impairment or failure of one bank could potentially increase the probability of impairment or failure of other banks if there is a high degree of interconnectedness (contractual obligations) between them.
This chain effect operates on both sides of the balance sheet there may be interconnections on the funding side as well as the asset side.
The larger the number of linkages and size of individual exposures, the greater is the potential for the systemic risk getting magnified, which can lead to nervousness in the financial sector.
Therefore, D-SIB provides the financial sustainability in the economy and also get the support from government during the time of stress as it is essential for financial viability of the economy.