NTH :: SBI, ICICI Bank are too big to fail: RBI

Anup Roy | Last Modified: Tue, Sep 01 2015. 01 21 PM IST | LiveMint.com
The banks have been named Domestic Systemically Important Banks (D-SIBs), with SBI falling in bucket three while ICICI Bank is in bucket one


Mumbai: The Reserve Bank of India (RBI) on Monday designated State Bank of India (SBI) and ICICI Bank Ltd, the country’s two largest lenders, as 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 deemed “too big to fail”, or so integral to the national economy that their failure would have to be prevented at any cost to prevent the calamitous effects it would otherwise have.

This is the first time the central bank has designated any banks as D-SIBs; this will now be an annual practice every August. Originally, the plan had been to list four to six banks in that category.

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.

As of 30 June, 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 capital of all listed banks, which was Rs.11.47 trillion at the close of trading on the BSE on Monday; ICICI’s share is 14.08%.

“From regulatory perspective, SBI and ICICI will have the highest level of systemic importance, but other banks, for example, large public sector banks like Bank of Baroda or Punjab National Bank, will have significant strategic importance,” said Naresh Takkar, managing director and group CEO of rating agency Icra Ltd.

“This is a signal that the two banks chosen are in a different level in terms of importance to the financial system,” Takkar said.

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

Banks which are considered systemically important will have to maintain a progressively higher share of risk weighted assets as Tier-I equity, which is a measure of the bank’s core capital.

Out of four systemic importance buckets, SBI falls in bucket three while ICICI Bank is in bucket one. The higher the bucket number, the more systemically important the bank. So, among the two, SBI is more systemically important.

Under the framework, systematically important banks (SIBs) will fall under four buckets initially. 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—a measure of the bank’s core equity.

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 to balance out the higher risk they pose to the financial system.

The original plan was to maintain additional capital in the range of 1-2.5% of the risk-weighted assets, depending upon the order of the buckets.

A theoretical empty fifth bucket will be there at the top of the list, with an additional Tier-1 capital requirement of 1%, down from 3.5% proposed earlier. As and when a bank moves to the fifth bucket in importance, another bucket will be introduced, RBI said in its July 2014 framework for dealing with such big banks.

The two banks named will be “subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system”, the framework said.

All banks have been given time until April 2019 to meet the additional requirements. RBI intends to review the list of SIBs once every year from now on.

The heads of both banks said they have adequate capital.

“RBI has named State Bank of India as Domestic Systemically Important Bank as expected. However, the additional capital requirement of Tier I Capital has been lowered by 20 bps (basis points) as compared to the draft guidelines. SBI currently has a much higher level of Tier I at 9.62% as opposed to 7.00% required under the current guidelines,” said Arundhati Bhattacharya, chairperson of SBI, in an emailed statement.

ICICI Bank’s capital adequacy is “well in excess of regulatory requirements and the bank is not expected to require fresh equity capital for the next couple of years”, said Chanda Kochhar, managing director and CEO. ICICI’s Tier-I capital was 12.26% as on 30 June.

In November 2011, the Basel committee of the Bank for International Settlements announced a framework for identifying global systemically important banks and the additional buffers that such banks need to hold.

Following this, most countries have moved to institute similar frameworks. RBI released its framework for dealing with domestic SIBs in July 2014.

“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,” RBI said then.

“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,” RBI said.

These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risk and moral hazard posed by them, RBI said.

The chief financial officer (CFO) of a large public sector bank said he expects more banks to figure in the list next year as aspects other than the size are considered for making up the list.

“Significant oversight does not mean that the central bank will check each and every business decision of these banks. It simply means that the central bank will force these banks to maintain a healthy net worth and keep bad debts under check,” said the CFO, who did not wish to be named.

Ashwin Ramarathinam contributed to this story.

Source : http://goo.gl/xZIJiy

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