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Shield for big banks on way

Mumbai, July 22: Beginning August 2015, the Reserve Bank of India will put out a list of domestically systemically important banks — entities whose collapse will significantly disrupt the economy.

Some banks and financial institutions can attain such pre-eminence on account of their size, complexity of operations and their strong links with the other segments of the economy. Besides, such is their nature of operations that there might not be effective substitutes.

The need for such a list arose after the global financial crisis in 2008 that was caused by problems faced by certain large and inter-connected financial institutions.

Switzerland-based Financial Stability Board (FSB) — a body that monitors the world financial system — in 2010 had recommended that all its member countries should have a framework to reduce risks in the operations of big banks.

As part of global efforts in this regard, the RBI had in December last year released a draft framework for dealing with domestically systemically important banks (D-SIBs).

The central bank today announced the final framework for such institutions.

RBI here disclosed that the names of the banks classified as systematically important will be released every August starting 2015.

Based on data till the end of the 2012-13 fiscal, the central bank expects 4-6 banks to fall in this category.

The RBI will follow a two-step process to identify such banks. In the first step, the sample of banks to be assessed for their systemic importance will be decided. This will be followed by a detailed study to fix their scores and rank.

Though smaller banks are likely to be excluded, the central bank has said that it will consider a few large foreign banks despite their relatively smaller balance sheet size.

The RBI said that based on a range of indicators, a composite score of systemic importance for each bank in the sample will be computed. The banks having systemic importance above a threshold will be designated as D-SIBs. They would be segregated into different buckets based on their scores.

 
 
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