Context:
Reserve Bank of India (RBI) releases 2024 list of Domestic Systemically Important Banks (D-SIBs)
D-SIBs:
- Banks that are considered “too big to fail” because their failure would significantly disrupt essential banking services and the overall economy.
- D-SIBs are crucial due to their size, complexity, cross-jurisdictional activities, and lack of substitutes.
- Regulated by – Reserve Bank of India (RBI)
- Regulation is based on the Basel Committee on Banking Supervision (BCBS) guidelines.
- Criteria for D-SIBs – Banks with a size equal to or more than 2% of GDP are considered for the D-SIB list.
- These banks are further categorized into 5 buckets based on their Additional Common Equity Tier 1 (CET1) requirements as a percentage of Risk Weighted Assets (RWAs).
- Bucket 1 banks have the lowest CET1 requirement, while Bucket 5 banks have the highest.
- Currently, there are 3 D-SIBs in India – State Bank of India, HDFC Bank and ICICI Bank
What is Common Equity Tier 1 (CET1)?
- A core measure of a bank’s financial strength. It consists of the bank’s common shares, retained earnings, and other reserves.
- Why it matters? CET1 is crucial because it represents the most reliable and stable form of capital that a bank hold. It acts as a buffer to absorb losses and protect depositors and the financial system during tough times.
What is Risk Weighted Assets (RWAs)?
- RWAs are a way to measure the riskiness of a bank’s assets. Different types of assets (like loans, investments, etc.) are assigned different risk weights. For example, a loan to a stable government might have a lower risk weight compared to a loan to a new business.
- Why it matters? By calculating RWAs, regulators can ensure that banks hold enough capital to cover potential losses from their riskier assets. This helps maintain the stability of the banking system.
- In simple terms, CET1 is like a safety net made up of the bank’s most secure capital, while RWAs help determine how much of this safety net is needed based on the riskiness of the bank’s assets.
Read about Global Systemically Important Banks (G-SIBs)
Source: The Indian Express
Previous Year Question
The terms ‘Marginal Standing Facility Rate’ and ‘Net Demand and Time Liabilities’ sometimes appearing in news, are used in relation to:
[UPSC Civil Service Exam – 2014 Prelims]
(a) Banking operations
(b) Communication networking
(c) Military strategies
(d) Supply and demand of agricultural products
Answer: (a)