Reserve Bank of India (RBI) added banking major HDFC Bank to a list of “domestic systemically important banks”, or the equivalent of “too big to fail”, according to a statement on Monday.
HDFC Bank, the second-biggest Indian lender by assets, joins top lender State Bank of India and third-ranked ICICI Bank on the list.
Being named systemically important imposes additional capital requirements on the lenders.
With the inclusion of HDFC Bank in the list, there will now be three too big to fail financial entities in the country. SIBs are subjected to higher levels of supervision so as to prevent disruption in financial services in the event of any failure. "The additional Common Equity Tier 1 (CET1) requirement for D-SIBs has already been phased-in from April 1, 2016 and will become fully effective from April 1, 2019," the Reserve Bank said in a statement.
The additional CET1 or core capital requirement will be in addition to the capital conservation buffer, it added. RBI had issued the framework for dealing with D-SIBs in July 2014.
As per the framework, RBI has to disclose the names of banks designated as D-SIBs every year in August starting from 2015 and place these banks in appropriate buckets depending upon their Systemic Importance Scores (SISs).
SIBs are seen as too big to fail (TBTF), creating an expectation of government support for them in times of financial distress. These banks also enjoy certain advantages in funding markets.
On the downside, according to some experts, expectations of government support amplifies risk-taking, reduces market discipline, creates competitive distortions and increases probability of distress in future.