RBI's draft norms on large banks seek additional capital buffer

To protect the financial system from risks emanating from large banks, the Reserve Bank of India (RBI) has floated draft guidelines for the domestic systemically important banks (D-SIBs) that would require such lenders to maintain an additional core capital of up to 0.80 per cent starting 2015.

According to the draft guidelines, a list of D-SIBs will be made public every August starting from 2015.

These D-SIBs will be selected based on a pre-determined formula and will be required to maintain higher core tier-I capital ranging from 0.20 to 0.80 per cent of their risk weighted assets, according to the draft RBI guidelines issued on Monday. 

The classifying system is based on the BCBS (Basel Committee for Banking Supervision) framework for global systematically important banks (SIBs) and involves computation of composite systemic importance score for banks which will be arrived at post-considering a bank's size, interconnectedness, substitutability and complexity, the apex bank said.

SBI has alone has more than 20 per cent market share in the Indian banking system. In the private sector, lenders, including ICICI Bank and HDFC Bank, have significant influence.

"The Reserve Bank will determine a cut-off score beyond which banks will be considered D-SIBs. Based on their systemic importance scores, banks will be plotted into different buckets," the RBI said.

The draft guidelines say in the eventuality of a financial crisis, issues faced by large financial institutions in an interconnected system harm the real economy and in some cases, the governments has to intervene to ensure financial stability.

"Costs of public sector intervention and consequential increase in moral hazard require that future regulatory policies should aim at reducing the probability of failure of systemically important banks and also should try to reduce the impact of the failure of these banks," it said. 

It added that setting aside additional capital will also ensure a level-playing field between SIBs and non-SIBs. The RBI has invited comments on the draft guidelines till December 31.