It has been a routine activity for the Reserve Bank of India to identify certain banks as domestic systemically important banks (D-SIBs). Last week, on Thursday, the central bank published the list for FY25. The usual three — State Bank of India among public sector banks and HDFC Bank and ICICI Bank among private banks — found mention in the list.
Colloquially, such banks are reckoned as ‘too big to fail’ and certainly so because they represent over 50 per cent of the country’s total banking system. Banks classified so are required to hold addition common equity Tier-1 capital as a percentage of risk weighted assets so that they have the capital cushion to handle any crisis. In 2010, post the global financial crisis, the Financial Stability Board of the Basel Committee on Banking Supervision recommended that all member countries should have a framework to reduce risks attributable to Systemically Important Financial Institutions, and in the process identify and establish a regulatory framework to deal with D-SIBs. India adopted this concept in 2014, along with its global peers, and in 2015, named SBI and ICICI Bank as D-SIBs. A year later, HDFC Bank was added to the list.
While this classification is at one end, it’s equally important to acknowledge that the RBI has always handled any bank failure with such vigour that these events have barely dented the overall stability and balance of the country’s banking system. Whether it was the massive failure of Global Trust Bank two decades ago, or the more recent YES Bank crisis that could have severely jolted the country’s financial stability and image in the global arena, the central bank was quick to cautiously execute a rescue mechanism.
In short, for the RBI, irrespective of the size, every bank is reckoned as ‘too big to fail’, and this is the approach adopted every time the country faced a crisis.
In fact, including the largest urban cooperative bank, India has seen three bank failures in a span of two years (2019 and 2020). What’s extremely appreciable is that unlike the past instances, where failed banks were handed out to large PSU and private banks to rescue them, the RBI devised newer solutions to handle each crisis. Whether it was a consortium of financial institutions led by SBI, which bailed out YES Bank, or Lakshmi Vilas Bank’s buyout by DBS Bank India or Unity Small Finance Bank created to rescue PMC Bank, each of these are out-of-text book solutions devised by the RBI to ensure that no bank, big or small, is left to fail.
In a country where depositors’ money forms the bedrock for the banking system, truly the regulator cannot afford any bank to fail, irrespective of its positioning or scale in the system. Therefore, while the three banks – SBI, HDFC Bank and ICICI Bank are classified as D-SIBs — in reality, every bank is systemically important. The nomenclature of D-SIB is important from a global compliance perspective, but in practice almost every bank has been treated as too big to fail.
"Too big to fail" (TBTF) is a theory in banking and finance that asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and therefore should be supported by government when they face potential ...
Once upon a time, "too big to fail" was shorthand to villainize big banks — these days, it's a way to say "your money is safe." Why it matters: The shift in meaning raises the possibility that more banks will become too big to fail (TBTF) — through regulation or simply through consolidation.
In February 2009, under new President Barack Obama, Congress passed the $789 billion American Recovery and Reinvestment Act, which helped bring about an end to the economic recession. The stimulus package included $212 billion in tax cuts and $311 billion in infrastructure, education and health care initiatives.
The government stepped in with a massive bailout package to prevent these institutions from going under and further damaging the economy. Though a few of these institutions were allowed to fail, such as Lehman and Bear, the government prevented the collapse of other large banks, all of which continue to thrive today.
The bill defines “Too Big to Fail” as any entity with total exposure is greater than 3 percent of our nation's GDP—meaning that if the entity failed, due to its size, exposure to counterparties, liquidity position, interdependencies, role in critical markets, or other factors it would have a catastrophic effect on the ...
RBI continues to classify SBI, ICICI Bank and HDFC Bank in the category of D-SIBs. But, what are D-SIBs? These are the banks which are so important for the country's economy that the government cannot afford their collapse. Hence, D-SIBs are thought of as “Too Big to Fail” (TBTF) organisations.
Zero-balance account (ZBA) A cash management service offered by banks. A bank checking account that can accept deposits and/or make disbursem*nts but that is always maintained at a zero balance.
The Bank of the Commonwealth bailout in 1972 was the first too-big-to-fail bailout of the modern era. It was then followed by a sequence of too-big-to-fail bailouts by the FDIC and the Federal Reserve that led to the Continental bailout of 1984 and, ultimately, those of the recent financial crisis.
To wrap it up, though the world might witness financial problems in the coming years, probably because the recession is part and parcel of an economic cycle, the great financial crisis of 2008 was a phenomenon in itself and is most likely not going to occur again. Happy Investing!
Did Anyone Go to Jail for the 2008 Financial Crisis? Kareem Serageldin was the only banker in the United States who was sentenced to jail time for his role in the 2008 financial crisis. He was convicted of hiding losses by mismarking bond prices.
Financial institutions were to blame for the Great Recession, because they created trillions of dollars in risky mortgages and they packaged, repackaged, and sold those loans to investors around the world.
Wells Fargo's behavior reflects the persistence of the nation's too-big-to-fail problem, in which a handful of megabanks enjoy a government guarantee against failure—and may treat their customers with impunity—because of the risks they pose.
Washington Mutual's failure in 2008, during the financial crisis, is the largest in the country's history. It stemmed from the bank's risky mortgage lending practices. Even more recently were the failures of Silicon Valley Bank and Signature Bank in 2023.
Adjustable interest rate APR based on corporate policy changes or product and service modifications can lead to lower earnings and additional costs. Big banks often charge monthly service fees for account maintenance, whereas local community banks are more likely to offer customers fee-free account service.
A systemically important financial institution (SIFI) is a bank, insurance company, or other financial institution whose failure might trigger a financial crisis. They are colloquially referred to as "too big to fail".
If the bank fails, you'll get your money back. Nearly all banks are FDIC insured. You can look for the FDIC logo at bank teller windows or on the entrance to your bank branch. Credit unions are insured by the National Credit Union Administration.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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