The Concept of 'Too Big To Fail' Banks

“Too Big To Fail” is a phrase used to describe financial institutions that are so integral to the economy that their failure could cause a major economic crisis.

• The institutions that fall under this category are typically large, interconnected, and play such a crucial role that their failure could set off a domino effect, potentially leading to the collapse of the entire financial system.

Indian Scenario: 'Too Big To Fail' Banks

In the Indian context, a few banks fall under the 'too big to fail' category. These include the State Bank of India (SBI), ICICI Bank, and HDFC Bank.

• These banks hold significant importance due to their size and the pivotal role they play in the Indian financial system. For instance, SBI is the largest bank in India, controlling a significant portion of the country's total banking assets.
• Similarly, ICICI Bank and HDFC Bank also hold substantial assets and have a wide customer base, making them integral to the Indian economy.

Classification of Systemically Important Banks

• The Reserve Bank of India (RBI) has classified SBI, ICICI Bank, and HDFC Bank as Domestic Systemically Important Banks (D-SIBs).
• This classification is done through a two-step process:

1. Firstly, a sample of banks is selected for assessment based on their size (as per the Basel-III Leverage Ratio Exposure Measure) as a percentage of GDP. Banks with a size exceeding 2% of GDP are included in the sample.
2. Following the sample selection, the banks are ranked based on their systemic importance. Various measures and provisions are implemented based on these scores. For instance, a D-SIB with a lower score will attract a lower capital charge, while a D-SIB with a higher score will attract a higher capital charge.

These measures taken by the RBI aim to minimize the risks associated with large, complex financial institutions and maintain the stability of the financial system.

Related Links