The Reserve Bank of India (RBI) announced on Tuesday that the State Bank of India (SBI), ICICI Bank and HDFC Bank will continue to be identified as Domestic Systemically Important Banks (D-SIBs). According to the central bank, D-SIBs are financial institutions that are large enough where they cannot be allowed to fall.

What are domestic systemically important banks (D-SIB)?

Due to the way the D-SIBs become completely enmeshed in cross-jurisdictional activities, their complex financial structures, and the lack of other alternatives, they are considered systematically important.

A failure of any of these banks can lead to systemic and significant disruption to essential economic services across the country and can cause an economic panic. As a result of their importance, the government is expected to bail out these banks in times of economic distress to prevent widespread harm. Additionally, D-SIBs follow a different set of regulations in relation to systemic risks and moral hazard issues.

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The system of D-SIBs was adopted in the aftermath of the 2008 financial crisis where the collapse of many systematically important banks across various regions further fueled the financial downturn.

How are D-SIBs determined?

Since 2015, the RBI has been releasing the list of all D-SIBs. They are classified into five buckets, according to their importance to the national economy. In order to be listed as a D-SIB, a bank needs to have assets that exceed 2 percent of the national GDP. The banks are then further classified on the level of their importance across the five buckets.

ICICI Bank and HDFC Bank are in bucket one while SBI falls in bucket three, with bucket five representing the most important D-SIBs.

What regulations do these banks need to follow?

Due to their economic and national importance, the banks need to maintain a higher share of risk-weighted assets as tier-I equity. SBI, since it is placed in bucket three of D-SIBs, has to maintain Additional Common Equity Tier 1 (CET1) at 0.60 percent of its Risk-Weighted Assets (RWAs).

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ICICI and HDFC on the other hand, have to maintain Additional CET1 at 0.20 percent of their RWA due to being in bucker one of D-SIBs.