-RBI to list banks that can hit the system
To disclose names by Aug 2015; foreign banks to be covered too-Business Standard
The Reserve Bank of India (RBI) has initiated a framework to identify systemically important banks operating in India. It plans to identify these and announce their names by August 2015.
The move was prompted by the recent financial crisis, when it was observed problems faced by certain large and highly interconnected financial institutions affected the orderly functioning of the financial system which, in turn, hit the real economy.
The central bank has said institutions considered too big to fail pose moral hazard issues, as perceived expectations of government support amplify risk-taking, reduce market discipline, create competitive distortions and increase the probability of distress.
The central bank has released a discussion paper for the framework to deal with domestic systemically important banks and has sought feedback from all stakeholders.
Banks whose balance sheets, as percentage of gross domestic product, exceed two per cent will be selected in the sample of banks. Foreign banks operating in India have smaller balance sheets. However, since foreign banks are active in the derivatives market and, therefore, specialised services provided by these banks might not be easily substituted by domestic banks, RBI has proposed to include a few large foreign banks in the sample list to consider their systemic importance.
The indicators to be used to assess systemic importance are size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen, a relative composite systemic importance score of the banks will be computed and RBI will determine a cut-off score, beyond which banks will be considered D-SIBs. “Based on their systemic importance scores, banks will be plotted into different buckets. SIBs (systemically important banks) will be required to have an additional common equity tier-I capital requirement ranging from 0.2 per cent to 0.8 per cent of risk-weighted assets,” RBI said.
These entities will also be subjected to differentiated supervisory requirements and more supervision, based on the risks they pose to the financial system. Computation of systemic importance scores will be carried out at annual intervals.
SYSTEMICALLY IMPORTANT
* The move was prompted by the recent financial crisis, when it was observed problems faced by certain large and highly interconnected financial institutions affected the orderly functioning of the financial system which, in turn, hit the real economy
* RBI has said institutions considered too big to fail pose moral hazard issues, as perceived expectations of government support amplify risk-taking, reduce market discipline, create competitive distortions and increase the probability of distress
The move was prompted by the recent financial crisis, when it was observed problems faced by certain large and highly interconnected financial institutions affected the orderly functioning of the financial system which, in turn, hit the real economy.
The central bank has said institutions considered too big to fail pose moral hazard issues, as perceived expectations of government support amplify risk-taking, reduce market discipline, create competitive distortions and increase the probability of distress.
The central bank has released a discussion paper for the framework to deal with domestic systemically important banks and has sought feedback from all stakeholders.
Banks whose balance sheets, as percentage of gross domestic product, exceed two per cent will be selected in the sample of banks. Foreign banks operating in India have smaller balance sheets. However, since foreign banks are active in the derivatives market and, therefore, specialised services provided by these banks might not be easily substituted by domestic banks, RBI has proposed to include a few large foreign banks in the sample list to consider their systemic importance.
The indicators to be used to assess systemic importance are size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen, a relative composite systemic importance score of the banks will be computed and RBI will determine a cut-off score, beyond which banks will be considered D-SIBs. “Based on their systemic importance scores, banks will be plotted into different buckets. SIBs (systemically important banks) will be required to have an additional common equity tier-I capital requirement ranging from 0.2 per cent to 0.8 per cent of risk-weighted assets,” RBI said.
These entities will also be subjected to differentiated supervisory requirements and more supervision, based on the risks they pose to the financial system. Computation of systemic importance scores will be carried out at annual intervals.
SYSTEMICALLY IMPORTANT
* The move was prompted by the recent financial crisis, when it was observed problems faced by certain large and highly interconnected financial institutions affected the orderly functioning of the financial system which, in turn, hit the real economy
* RBI has said institutions considered too big to fail pose moral hazard issues, as perceived expectations of government support amplify risk-taking, reduce market discipline, create competitive distortions and increase the probability of distress
To ensure stability, RBI wants banks to build up capital buffer-Business Line
MUMBAI, DEC. 2:
The Reserve Bank of India on Monday said it will give banks lead time of a year to implement the counter-cyclical capital buffer regime, as and when it is ushered in.
In its draft report on implementation of CCCB regime in India, the RBI said it will endeavour to ensure that individual banks remain solvent through periods of stress.
The regime also seeks to ensure that the banking sector has capital in hand to help maintain the flow of credit in the economy during economic downturns and periods of stress.
When economic and financial conditions are buoyant, the stipulation regarding build-up of capital defences may have the additional benefit of moderating excessive credit growth as capital is a more expensive form of funding, the RBI said.
During the period of excessive credit growth, the buffer may act as a moderator from the debtors’ perspective as it is likely to raise the cost of credit, and therefore, dampen its demand. Among the key recommendations of the RBI’s internal working group are: while the credit-to-GDP gap (the difference between the the current and long term average credit-to-GDP ratios) will be used to facilitate CCCB decision, it may not be the only reference point.
The credit-to-GDP gap may be used in conjunction with other indicators, such as growth in gross non-performing assets (GNPA), housing price index, equity, gold, C-D ratio, corporate sector’s ability to meet its debt obligations and RBI’s industrial and credit condition surveys for CCCB decisions in India.
The RBI may apply its discretion for use of indicators while activating or adjusting the buffer.
The lower threshold of the CCCB, when it is activated, may be set at three percentage points of the credit-to-GDP gap, provided its relationship with the GNPA remains significant and the upper threshold at 15 percentage points.
Systemically important banks should maintain higher tier 1 capital, RBI proposes
MUMBAI, DEC. 2:
Domestic-Systemically Important Banks (D-SIBs) will have to maintain additional common equity Tier 1 capital ranging from 0.20 per cent to 0.80 per cent of their risk-weighted assets, according to draft framework for dealing with such banks.
Common equity tier (CET) 1 capital includes common shares; share premium resulting from the issue of instruments, including CET 1; and retained earnings.
Risk-weighted assets means a bank’s assets or off-balance-sheet exposures are weighted according to risk The higher loss absorbency, met through CET 1 capital, is required as D-SIBs assume systemic importance due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness.
The disorderly failure of these banks has the propensity to cause significant disruption to the essential services provided by the banking system and, in turn, to the overall economic activity.
These banks are considered D-SIBs as their continued functioning is critical for the uninterrupted availability of essential banking services to the real economy.
The process of assessment of SIBs will be a two-step process. First, the sample of banks to be assessed for their systemic importance will be decided.
SELECTION OF BANKS
The banks having a size of beyond 2 per cent of GDP will be selected in the sample of banks. A few large foreign banks would also be included in the sample of banks to compute the systemic importance.
Once the sample of banks is selected, detailed study to compute their systemic importance could be initiated.
Based on a range of indicators, a composite score of systemic importance for each bank in the sample will be computed. The banks having systemic importance above a threshold will be designated as D-SIBs.
These would then be segregated into different buckets based on their systemic importance scores, and subject to loss absorbency capital surcharge in a graded manner depending on the buckets in which they are placed.
A D-SIB in lower bucket will attract lower capital charge and a D-SIB in higher bucket will attract higher capital charge.
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