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Systemically Important Financial Institutions (SIFIs)

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Financial Stability Board (FSB) refers Systemically Important Financial Institutions (SIFIs) as institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity”. World financial history is abound with events of such institutions going into troubles, posing threat to the system and eventually rescued by the state. Identification and regulation of SIFIs are, therefore, crucial in systemic risk management. As a matter of fact, SIFIs reflect how risks are distributed across the financial system at any particular point of time (i.e. cross-section aspect of systemic risk). At global level, based on the suggestion of G-20 Leaders in Pittsburgh summit in 2009, FSB spearheads the efforts of formulating a framework for assessing and regulating SIFIs.

SIFIs as 'Too Big to Fail' Institutions

Systemically Important Financial Institutions (SIFIs) are perceived as institutions that are Too Big to Fail (TBTF)[1]. Indeed they are TBTF, but a SIFI status tells more than a TBTF status. Insofar as the systemic significance of a financial institution is reflected, one term can justifiably be used as synonym for the other. Because TBTF status is quiet about the regulatory mechanisms needed to rectify the adverse outcomes associated with conferring that status to a financial institution, the notion of TBTF is limited in scope.

To consider a financial institution as TBTF implies that the institution enjoys an implicit sovereign guarantee against its failure. But it cannot be done without inviting some perverse outcomes. Moral hazard[2] is the oft repeated problem associated with TBTF. Creditors to a financial institution, say a bank, may be least interested in monitoring its activities and thus permitting the bank to tread a risky path, when they knew beforehand that the bank is considered to be too big to fail by the government and regulator. These are uninsured large creditors, including holders of debt and equity, who do not enjoy insurance cover under usual deposit insurance mechanism (Mishkin, 2004). The conception of TBTF, as Stern and Feldman (2004) put, gives rise to “a policy environment in which uninsured creditors expect the government to protect them from prospective losses from the failure of a big bank”. However, to extend government protection to an insolvent institution is not a cakewalk. On both moral and economic grounds, the action invites criticisms (Moosa, 2010). Even on the premise of ‘public interest’, morally, it is hard to square with the idea that the rest of the society is paying for the losses of a sinking institution, which is spared from confronting the consequences of its own reckless actions. Advocates of laissez faire would indict the government for weakening market discipline and rewarding inefficiency. For them, failure of any firm must be allowed as it is the very outcome of a free market economy and part of ‘creative destruction’, an essential aspect of capitalism (Moosa, 2010). If the government finances the bail-out using borrowed money, there is a concern that future generations shall bear the tax burden. If it is done through printing money, the worry is over the resultant hyperinflation (Moosa, 2010).

By laying out identification criteria and regulatory approach with respect to institutions of systemic import, the concept of SIFI is much more refined than TBTF idea. TBTF considerations, employed in case of many financial institutions, did not arise out of a globally accepted framework and were amateur and ambiguous. Usually, in TBTF idea, the aspect of size of an institution is overemphasised to the neglect of other aspects in assessing the systemic significance of an institution (Moosa, 2010). Thomson (2009) says that concentration, contagion, correlation and conditions are as important as size in deciding an institution’s systemic importance. The other distinctive aspect of SIFI concept is the inclusion of a regulatory approach. As and when an institution is identified as SIFI, necessarily, it becomes an obligation for it to maintain an addition Tier 1 capital to act as a bulwark against many ills associated with a ‘too big to fail’ institution. Persuad (2014) rightly says that the purport of a SIFI framework is “to internalise the adverse, wider consequence of a bank [institution] being too big to fail...”

Global Framework for SIFIs

The document brought out by Financial Stability Board (FSB) in 2010, titled Reducing the moral hazard posed by systemically important financial institutions: FSB recommendations and time lines, has arguably been the most important global effort to fix the dilemma caused by TBTF institutions. Its aim was to address “the systemic and moral hazard risks associated with SIFIs whose disorderly failure,...would cause significant disruption to the wider financial system and economic activity”. In Seoul summit of 2010, G-20 (Group of 19 countries +European Union) endorsed this document. The document recommended, inter alia, that the FSB and national authorities shall decide those institutions, based on the methodology developed by international standard setting bodies (BCBS, IAIS, IOSCO, CGFS and CPSS /CPMI), to which FSB Global SIFI (G-SIFI) recommendations can be applied. Based on this recommendation, Basel Committee of Banking Supervision (BCBS) had come up with Global systemically important banks: assessment methodology and the additional loss absorbency requirement in 2011; International Association of Insurance Supervisors (IAIS) published Globally systemically important insurers: assessment methodology in 2013; FSB and International Organisation of Securities Commissions (IOSCO) brought out a consultative document on Assessment methodologies for identifying non-bank, non-insurer global systemically important financial institutions (NBNI G-SIFIs) in 2014. Broad aims of these efforts are (a) to reduce the likelihood of failure of an institution by increasing its loss-absorbency capacity and (b) to mitigate the impact of failure of the institution, if it happens, through its orderly resolution.

Based on the BCBS methodology, FSB publishes the list of Global Systemically Important Banks (G-SIBs) annually. Similarly the FSB, in consultation with the IAIS and national authorities, identifies Global Systemically Important Insurers (G-SIIs) as part of its annual identification process of global SIFIs.

Given below is a brief exposition on BCBS efforts to identify, assess and regulate global systemically important banks (G-SIBs). To assess the systemic importance of banks, an indicator-based approach, as against a model-based approach, is used; qualitative information is also considered to supplement the approach. The approach is based on a large sample of banks. Indicators are selected to reflect five aspects of G-SIBs: (i) size, (ii) interconnectedness, (iii) substitutability, (iv) cross-jurisdictional activity and (v) complexity (Refer Table 1).

Table 1: Indicator-based Measurement Approach

Category (Weighting)

Indicators (Weights)

Cross-jurisdictional activity (20%)

Cross-jurisdictional claim (10%)

Cross-jurisdictional liabilities (10%)

Size (20%)

Total exposure as defined for use in the Basel III leverage ratio (20%)

Interconnectedness (20%)

Intra-financial system assets (6.67%)

Intra-financial system liabilities (6.67%)

Securities outstanding (6.67%)

Substitutability/ financial market institution infrastructure (20%)

Assets under custody (6.67%)

Payments activity (6.67%)

Underwritten transactions in debt and equity markets (6.67%)

Complexity (20%)

Notional amount of over-the-counter (OTC) derivatives (6.67%)

Level 3 assets (6.67%)

Trading and available-for-sale securities (6.67%)

Source: Basel Committee of Banking Supervision (2013), Global systemically important banks: assessment methodology and the additional loss absorbency requirement

Each bank gets a score in each of the five aspects that are given equal weights and an overall score for each bank is arrived at by taking a simple average of all the five scores. Those banks whose overall scores of systemic importance exceed a cut-off level, fixed by BCBS, are classified as G-SIBs. Based on their overall scores, then, these banks are categorised in five equally-sized buckets. G-SIBs in bucket 5 are systemically more important than those in the lower bucket. G-SIBs thus categorised in each of the buckets are required to hold additional capital as ‘higher loss absorbency’; Common Equity Tier 1 (CET1) capital, as defined by Basel III[3] , is used for this purpose. G-SIBs placed in top buckets need to maintain more such additional capital than those placed in bottom buckets. For instance, G-SIBs in bucket 5 need to hold 3.5 per cent additional capital (i.e. CET1 capital as a percentage of risk-weighted assets), while those in bucket 4, 3, 2 and 1 are required to hold 2.5%, 2%, 1.5% and 1% respectively. This has at least two benefits. First, expansion of any bank, identified as G-SIBs, would put them in higher buckets where they have to hold more capital and it is costly to do so. Hence it is a disincentive for banks, designated as G-SIBs, to expand further. Second, by holding more capital the resilience of the institution rises. The resolution aspect of these institutions, however, lies beyond the scope of this framework. Rather the purpose of this framework is to reduce moral hazard problem linked to TBTF principle, to lessen the probability of the institution’s failure by “increasing its going-concern loss absorbency” and eventually to render a level playing field between G-SIBs and non-G-SIBs in the sense of neutralising the competitive advantage received by G-SIBs in funding markets (BIS, 2013).

SIFIs in India

Even before developing an exclusive framework for SIFIs, Reserve Bank of India (RBI) has been regulating systemically important institutions among non-banking financial companies (NBFCs) since April 2007. Systemically Important Non-Deposit Taking NBFC (NBFC-NDSI) is defined as a non-banking financial company not accepting / holding public deposits and having total assets of Rs. 500 crore and above[4]. They are subject to stringent prudential regulation which includes maintenance of capital adequacy ratio of 15%, exposure norms, asset liability management discipline, Income Recognition and Asset Classification (IRAC) norms, corporate governance standards and disclosure norms. Nevertheless, this regulation has not been in the spirit of FSB recommendation of assessing SIFIs.

As a bank-dominated financial system, India began with the assessment of SIFIs in the banking system calling them Domestic Systemically Important Banks (D-SIBs). In July 2015, RBI released a Framework for dealing with domestic systemically important banks, based on which D-SIBs are recognised in India. RBI has followed, more or less, the methodology of BCBS with some modifications to suit domestic conditions. The sample for the assessment consisted of those banks having a size over and above 2 per cent of GDP. Unlike BCBS methodology, only four aspects are considered for assessing D-SIBs. Size, interconnectedness, substitutability and complexity are those four aspects with size receiving 40% weight and other receiving 20% weight each; this is because size is considered to be a more important aspect than others. The Framework also requires that D-SIBs may be placed in five buckets depending upon their Systemic Importance Scores (SISs). The additional CET1 capital requirement in these five buckets are 1%, 0.80%, 0.60%, 0.40% and 0.20% respectively. The names of the banks classified as D-SIBs are disclosed in the month of August every year, starting from 2015. In August 2015, RBI announced, for the first time, State Bank of India (SBI) and ICICI as D-SIBs; and the list is revised annually. Latest addition was HDFC Bank.

For assessing SIFIs in other areas of financial system such as securities market, insurance and pension sectors, a similar framework needs to be developed.

In the proposed Bill-27092016_1.pdf Financial Resolution and Deposit Insurance Bill, 2017 which provides for a comprehensive resolution framework to deal with bankruptcy situation in banks, insurance companies and financial sector entities, it is specified that the Central Government, in consultation with the appropriate sectoral regulator may designate certain categories of financial institutions as SIFIs (under Section 25 of the draft bill).

The Bill outlines the criteria for designation of a financial service provider as a Systemically Important Financial Institution. The following features of a financial service provider: (a) size; (b) complexity; (c) nature and volume of transactions with other financial service providers; (d) interconnectedness with other financial service providers; and such other related matter as may be prescribed - shall be taken into consideration, while specifying an entity as SIFI.

Given their importance for the economy, the Bill envisages some additional powers in respect of these SIFIs when it comes to their resolution or bankruptcy. All SIFIs are expected to provide such information in such frequency and such manner as may be specified by the Resolution Corporation, to monitor the safety, soundness and solvency of such SIFIs. Resolution Corporation can also do inspection of SIFIs in addition to sectoral regulators. It is specified in the Bill that the Central Government, may by an order to be published in the official gazette, appoint a body constituted by it to discharge its powers and functions in respect of SIFIs. However, this assignment can happen only once the Bill is passed.

Systemically important Financial Market Infrastructures (S-FMI)

A concept closer to SIFI is systemically important Financial Market Infrastructures[5]. In April 2012, the then Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) published the standards report Principles for financial market infrastructures (PFMIs). The new standards replaced the three existing sets of international standards set out in the Core principles for systemically important payment systems (CPSS, (2001)); the Recommendations for securities settlement systms (CPSS-IOSCO, (2001)); and the Recommendations for central counterparties (CPSS-IOSCO, (2004)). The new standards (called principles) are designed to ensure that the essential infrastructure supporting global financial markets is even more robust and thus even better placed to withstand financial shocks than at present. Principles for financial market infrastructures contain a single, comprehensive set of 24 principles designed to apply to all systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively called financial market infrastructures or FMIs). These FMIs collectively record, clear and settle transactions in financial markets. Financial Market Infrastructures (FMIs) that are determined by national authorities to be systemically important are expected to observe these principles.

As against SIFIs, the concept of S-FMIs focuses on infrastructure service providers like stock exchanges, depositories or clearing corporations, whereas SIFIs would refer to individual mutual funds or banks or some such individual service providers.

S-FMIs in India

Though the expression “Financial Market Infrastructure” is not specifically defined in the Payment and Settlement Systems (PSS) Act, the definition of payment systems in the PSS Act includes all categories of FMIs as indicated in the PFMI report except for the Trade Repository.

An authorized payment system would be categorised as an FMI as and when it reaches systemic importance which could be based on various parameters such as (i) volume and value of transactions; (ii) share in the overall payment systems; (iii) markets in which it is operating; (iv) degree of interconnectedness and interdependencies; (v) criticality in terms of concentration of payment activities etc. The Reserve Bank maintains a separate list of authorized payment systems which are declared as FMIs and are made public. As in June 2017, its list includes, Real Time Gross Settlement System (RTGS), Securities Settlement Systems (SSS), Clearing Corporation of India Ltd (CCIL) and Negotiated Dealing System- Order Matching (NDS-OM). More details may be seen here.

SEBI vide its circular dated September 04, 2013 clarified that SEBI as a member of IOSCO is committed to the adoption and implementation of the new CPSS-IOSCO standards of PFMIs in its regulatory functions of oversight, supervision and governance of the key financial market infrastructures under its purview. SEBI clarified that the following Depositories and Clearing Corporations regulated by SEBI are FMIs and would be required to comply with the PFMIs specified by CPSS-IOSCO as applicable to them.

Clearing Corporations

a) Indian Clearing Corporation Ltd. (ICCL)

b) MCX-SX Clearing Corporation Ltd. (MCX-SXCCL)

c) National Securities Clearing Corporation Ltd. (NSCCL)

(In India, stock / securities exchanges have separated out the clearing function to independent entities called clearing corporations)


d) a. Central Depository Services Ltd. (CDSL)

e) b. National Securities Depository Ltd (NSDL)

On 16 December 2016 SEBI declared the two prominent national commodity exchanges - National Commodity & Derivatives Exchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX), as systemically important Financial Market Infrastructure (FMIs). They are in the process of complying with the Principles for FMIs (PFMIs) specified by CPSS-IOSCO. Commodity derivatives exchanges carry out clearing and settlement processes in-house. Hence, commodity exchanges are identified as S-FMIs while stock exchanges are not. However, SEBI has advised them to separate out clearing operations to a separate legal entity over a period of time.

Data on SIFIs

Data on G-SIBs and G-SIIs (global systemically important insurers) may be seen here.

1. It was during 1980s that TBTF principle caught the popular imagination, when Continental Illinois National Bank, the then seventh largest bank in US with $40 billion assets, faced distress and was bailed-out thereafter in 1984 (Stern and Feldman, 2004).

2. Moral hazard is a concept which focuses on rational behaviour, usually with respect to information asymmetry. It is opportunistic behaviour, i.e., behaviour which takes advantage of an opportunity for personal benefit even if it is at the expense of others. Eg. Concept of moral hazard in the field of insurance refers to the possibility that insurance would encourage the insured party to take on additional risk in a way which could not effectively be monitored.

3. Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to:

4. As of March 2017, there were 11,517 non-banking financial companies (NBFCs) registered with the Reserve Bank, of which 179 are deposit-accepting (NBFCs-D). There were 220 Systemically Important Non-Deposit accepting NBFCs (NBFCs-ND-SI). NBFCs-ND-SIs are NBFCs-ND with assets of Rs.5 billion and above.

5. Financial Market Infrastructure (FMI) are critically important institutions responsible for providing clearing, settlement and recording of monetary and other financial transactions. The different categories of FMIs, as identified under Principles for financial market infrastructures [PFMIs], are -

Payment Systems (PSS)

A payment system is a set of instruments, procedures, and rules for the transfer of funds between or among participants. The system includes the participants and the entity operating the arrangement. Payment systems are typically based on an agreement between or among participants and the operator of the arrangement, and the transfer of funds is effected using an agreed-upon operational infrastructure.

Central Securities Depositories (CSD)

Central securities depository provides securities accounts, central safekeeping services, and asset services, which may include the administration of corporate actions and redemptions, and plays an important role in helping to ensure the integrity of securities issues (that is, ensure that securities are not accidentally, or fraudulently created or destroyed or their details changed). A CSD can hold securities either in physical form (but immobilised) or in dematerialised form (that is, they exist only as electronic records). A CSD may maintain the definitive record of legal ownership for a security; in some cases, however, a separate securities registrar will serve this notary function.

Securities Settlement Systems (SSS)

A securities settlement system enables securities to be transferred and settled by book entry according to a set of predetermined multilateral rules. Such systems allow transfers of securities either free of payment or against payment. When transfer is against payment, many systems provide delivery versus payment (DvP), where delivery of the security occurs if and only if payment occurs. An SSS may be organised to provide additional securities clearing and settlement functions, such as the confirmation of trade and settlement instructions.

Central Counterparties (CCP)

A central counterparty interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts. A CCP becomes counterparty to trades with market participants through novation, an open-offer system, or through an analogous legally binding arrangement. CCPs have the potential to significantly reduce risks to participants through the multilateral netting of trades and by imposing more effective risk controls on all participants. For example, CCPs typically require participants to provide collateral (in the form of initial margin and other financial resources) to cover current and potential future exposures. CCPs may also mutualise certain risks through devices such as default funds. As a result of their potential to reduce risks to participants, CCPs also can reduce systemic risk in the markets they serve.

Trade Repositories (TR)

A trade repository is an entity that maintains a centralised electronic record (database) of transaction data. TRs have emerged as a new type of FMI and have recently grown in importance, particularly in the OTC derivatives market. By centralising the collection, storage, and dissemination of data, a well-designed TR that operates with effective risk controls can serve an important role in enhancing the transparency of transaction information to relevant authorities and the public, promoting financial stability, and supporting the detection and prevention of market abuse. An important function of a TR is to provide information that supports risk reduction, operational efficiency and effectiveness, and cost savings for both individual entities and the market as a whole. Such entities may include the principals to a trade, their agents, CCPs, and other service providers offering complementary services, including central settlement of payment obligations, electronic novation and affirmation, portfolio compression and reconciliation, and collateral.

Also See

Contributed by


Bank of International Settlements (BIS) (2013) Basel Committee of Banking Supervision (BCBS) on Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement accessed from on May 25, 2017

Financial Stability Board (FSB) (2010) Reducing the Moral Hazard Posed by Systemically Important Financial Institutions: FSB Recommendations and Time Lines accessed from on May 25, 2017

Mishkin, F (2004) The Economics of Money, Banking and Financial Markets, Pearson Addison-Wesley, Boston

Moosa, I.A (2010) The Myth of Too Big To Fail, Palgrave Macmillan, Hampshire, UK

Persuad, A (2015) Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risk, Apress

Reserve Bank of India (2015) Framework for dealing with domestic systemically important banks accessed from on May 25, 2017

Stern, G.H. and Feldman, R.J (2004) Too Big To Fail: The Hazards of Bank Bailouts, Brooking Institution Press, Washington

Thomson, J. (2009) On Systematically Important Financial Institutions and Progressive Systemic Mitigation, Federal Reserve Bank of Cleveland, Policy Discussion Papers, No 27, August.

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