Mumbai: About four to six banks may be designated as domestic systemically important banks (D-SIBs) under various buckets, the RBI said on Tuesday as it unveiled the framework for identifying systemically important banks. D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system the RBI said.
Central banks said that during the recent global financial crisis, it was observed that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy.
Government intervention was considered necessary in many jurisdictions to ensure financial stability. The cost of public sector intervention and consequential increase in moral hazards required that future regulatory policies should aim at reducing the probability of failure of Systemically Important Banks (SIBs) and the impact of the failure of these banks.
SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets but brings with it certain risks and distortions. These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks.
