RBI to name top 4-6 banks, will regulate them tightly

The Reserve Bank of India (RBI) will start announcing the names of systemically important banks (D-SIBs) by August 2015. The central bank is expected to use a multiple indicator approach to for this classification.

This is similar to the category of too-big-to-fail banks in other countries based on the bank's size and systemic interconnectedness.

The central bank has laid out a framework to tightly regulate large and interconnected financial institutions in India, whose failure can seriously impact the functioning of the financial system in the event of an economic crisis.

The RBI said it would start disclosing the names of banks deemed as domestic systematically important banks, adding that as per data it had compiled as of March 31, 2013, four to six domestic lenders would qualify under the category.

The central bank said it would create four sub-categories of D-SIB lenders, each with different requirements for additional common equity Tier 1 capital requirements that would range from 0.20% to 0.80% of risk weighted assets.

The banks identified as D-SIBs would be plotted in four different buckets depending upon their systemic importance scores in ascending order and they would be required to maintain additional capital in the range of 1% to 2.5% of their risk weighted assets. Multiple indicators would be used to identify the systemically important banks.

The implementation of these measures will help reduce the probability and impact of failure of a D-SIB on the real economy and will also create a level playing field between the D-SIBs and non-D-SIBs by reducing competitive advantages of D-SIBs in funding markets. These policies will thus endeavour to curb amplification of risk taking and reduce competitive distortions. The RBI will set up additional capital buffers to prevent failure of banks.