Why SBI, ICICI and HDFC Bank are ‘too big to fail’

State Bank of India (SBI), along with ICICI Bank and HDFC Bank continue to be domestic systemically important banks (D-SIBs). D-SIBs are commonly known as lenders or institutions that are ‘too big to fail’. The Reserve Bank of India (RBI) announced the 2020 list of D-SIBs in which it declared these banks to be a domestic systemically important bank. “SBI, ICICI Bank, and HDFC Bank continue to be identified as Domestic Systemically Important Banks (D-SIBs), under the same bucketing structure as in the 2018 list of D-SIBs,” RBI said in a statement.

It classifies the banks under five buckets depending on the order of importance. ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three. Based on the bucket in which a D-SIB is, an additional common equity requirement applies. Banks in bucket one need to maintain a 0.20% incremental tier-I capital. Banks in bucket three have to maintain an additional 0.40%, while banks in bucket 3, 4, 5 have to maintain 0.60%, 0.80%, 1% respectively. With bucket three being higher than bucket one, SBI has a higher additional requirement than ICICI Bank and HDFC Bank.

The Reserve Bank had issued the Framework for dealing with D-SIBs on 22 July 2014. The D-SIB framework requires the central bank to disclose the names of banks designated as D-SIBs 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.

The list of D-SIBs is as follows:

Bucket	Banks	Additional Common Equity Tier 1 requirement as a percentage of Risk-Weighted Assets (RWAs)
5	Nil	1%
4	Nil	0.80%
3	SBI	0.60%
2	Nil	0.40%
1	ICICI and HDFC	0.20%

What does ‘too-big-to-fail’ mean

The ‘too big to fail’ (TBTF) theory asserts that certain corporations, especially financial institutions, are so large and so interconnected that their failure would have a domino effect on the economic system. In the event of its failure, the government would have to come to its rescue. The term ‘too big to fail’ was popularized by US Congressman Stewart McKinney in 1984. The phrase came into existence in the aftermath of the 2008 global financial crisis.

How does RBI identify these banks?

RBI follows a certain assessment methodology to identify D-SIBs that was prepared by the Basel Committee on Banking Supervision (BCBS). According to RBI, some banks become systemically important due to their size, complexity and interconnection. Banks whose assets exceed 2% of GDP are considered part of this group.

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“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, i.e., additional CET1 buffer prescribed by the home regulator (amount) multiplied by India RWA as per consolidated global Group books divided by total consolidated global Group RWA,” the central bank said.

Based on the methodology provided in the D-SIB framework and data collected from banks as on 31 March 2015, and 31 March 2016, the central bank had announced State Bank of India and ICICI Bank Ltd. as D-SIBs on 31 August 2015, and 25 August 2016, respectively.

Based on data collected from banks as of 31 March 2017, and 31 March 2018, the Reserve Bank had announced State Bank of India, ICICI Bank Ltd. and HDFC Bank Ltd. as D-SIBs on 4 September 2017, and 14 March 2019, respectively.

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The current update is based on the data collected from banks as of 31 March 2020.

So as a layman, depositors need not worry if they don’t see their bank in the D-SIB list. Whether your bank figures in the domestic systemically important banks list or not, your deposits are insured up to Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC). This means, in case of default, DICGC will pay you up to Rs 5 lakh.