HDFC added in “Too Big to Fail” list by RBI
The Reserve Bank of India today included HDFC Bank in the list of ‘too big to fail’ lenders making it the third such bank after SBI and ICICI in 2015. These banks are placed under the category referred as D-SIB or domestic systemically important bank.
“The additional Common Equity Tier 1 (CET1) requirement for D-SIBs has already been phased-in from April 1, 2016 and will become fully effective from April 1, 2019,” the Reserve Bank said in a statement. By finding a place in the D-SIB, these banks will be supervised on a regular basis to prevent any disruption in the discharge of duties in case of any failure.
The concept of D-SIB was proposed in 2014 with the framework being issued in July the same year. These banks will be placed based on their Systemic Importance Scores (SISs). SIBs are seen as ‘too big to fail (TBTF)’, creating expectation of government support for them in times of financial distress. These banks also enjoy certain advantages in funding markets.
However some experts feel that this would lead to expectations of government support amplifies risk-taking, reduces market discipline, creates competitive distortions and increases probability of distress in future which may act as a negative proposition for the banks.