Identification of Systemically Important Financial Institutions(SIFI)

 

The Financial Stability Board is an international body that monitors and makes recommendations about the global financial system. It was established in the 2009 G20 Pittsburgh Summit as a successor to the Financial Stability Forum. The Board includes all G20 major economies, FSF members, and the European Commission.

The FSB, in consultation with the Basel Committee on Banking Supervision (BCBS) and national authorities, has identified global systemically important banks (G-SIBs) since 2011. The list of G-SIBs is divided into ‘buckets’ corresponding to required level of additional loss absorbency.  The list of G-SIBs is updated annually each November, together with information on the application of policy measures to G-SIBs under the integrated set of policy measures to address the systemic and moral hazard risks associated with systemically important financial institutions published by the FSB in 2011.

BCBS publishes the methodology for assessing and identifying G-SIBs.

The FSB began identifying global systemically important insurers (G-SIIs), in consultation with the International Association of Insurance Supervisors (IAIS) and national authorities, in 2013. Following the finalisation of the IAIS’s Holistic Framework , the FSB, in consultation with the IAIS and national authorities, suspended G-SII identification at the start of 2020. In November 2022, the FSB announced that it would discontinue the identification of G-SIIs and that, going forward, it would base its considerations of systemic risk in the insurance sector on the IAIS Holistic Framework.

Since 2024, the FSB has published a list of insurers that – according to member authorities’ assessment and self-reporting – are subject to resolution planning and resolvability assessments consistent with the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs).

A threefold SIFI test @ European Union

Generally a threefold indicator-based SIFI test along the three dimensions outlined below are used : a market relevance test, a risk potential test and an interconnectedness test. Based on this logic, a financial institution is categorised as a SIFI, if and when it passes the SIFI test in all three dimensions (see Figure 1). The test should be repeated on a regular basis.

The threshold limit is decided by the authority that conducts country risk analysis in consultation with sectoral supervisors considering the threat, vulnerability and impact a RE may bring in. Each country may have their own prescriptions for the three factors mentioned above.

Given below is a diagram from intereconomics.eu depicting their assessment of SIFI in EU region.

 India and SIFI Identification

The Reserve Bank of India (RBI) began classifying banks as Domestic Systemically Important Banks (D-SIBs) by issuing a formal framework in July 2014. The first list of D-SIBs was announced in August 2015, naming the State Bank of India (SBI). 

Background and Rationale

The concept of systemically important financial institutions (SIFIs) emerged after the 2008 global financial crisis. The failure of large, interconnected institutions demonstrated that their collapse could severely disrupt the entire financial system and economy, leading to the "Too Big To Fail" (TBTF) designation. 

Following the framework established by the international Financial Stability Board (FSB) for Global Systemically Important Banks (G-SIBs), the RBI developed its own methodology for the domestic market. 

Key Milestones in the D-SIB Framework

2007: The RBI first put in place a specific regulatory framework for systemically important Non-Banking Financial Companies (NBFCs-ND-SI) with an asset size of ₹100 crore or more.

2014: The formal framework for D-SIBs was issued by the RBI.

2015: The RBI announced the first D-SIB: State Bank of India (SBI).

2016: ICICI Bank was added to the list.

2017: HDFC Bank was classified as a D-SIB, joining SBI and ICICI Bank.

2022: A new Scale-Based Regulatory Framework (SBR) for NBFCs was implemented, categorizing systemically significant NBFCs into upper layers based on size, complexity, and interconnectedness. 

Current Status

As of the most recent annual update (November 2024), SBI, HDFC Bank, and ICICI Bank remain on the list of D-SIBs and are subject to enhanced regulatory requirements, including maintaining an additional Common Equity Tier 1 (CET1) capital buffer. 

Significance of SIFI in the context of AML/CFT/PF

SIFI may be identified by taking into consideration following factors:

Size: The overall amount of financial services or intermediation provided by the institution.

Interconnectedness: The extent of a firm's direct and indirect linkages with other financial companies, which can transmit distress throughout the system.

Substitutability: The extent to which other firms could provide similar services in a timely manner if the institution were to withdraw from a specific market.

Complexity: The nature, scope, and organizational structure of the company.

Global Activity/Cross-Jurisdictional Presence: SIFIs often operate in many different countries through subsidiaries, making them subject to multiple regulatory regimes. 

Once identified, SIFIs face enhanced prudential regulations, including higher capital requirements, periodic stress tests, and the need to produce detailed "living wills" (resolution plans). 

Country Risk Analysis in AML/CFT

Country risk analysis in AML/CFT involves assessing the potential threats of money laundering (ML) and terrorist financing (TF) within a specific jurisdiction. This assessment is the foundation of the risk-based approach (RBA) recommended by the Financial Action Task Force (FATF). Key factors include: 

Regulatory Framework Effectiveness: Jurisdictions with weak or ineffective AML/CFT regimes pose elevated risks. The FATF conducts mutual evaluations to assess countries' compliance with standards.

Corruption and Governance: High levels of corruption or weak rule of law can facilitate illicit activities.

Sanctions and International Cooperation: Operating in or dealing with countries under international sanctions increases risk exposure.

Threat Profile: The nature and scale of ML/TF threats and related predicate crimes within the jurisdiction. 

Interplay Between SIFI Status and Country Risk

 

The SIFI designation and country risk analysis are intertwined in the following ways:

Enhanced Scrutiny: SIFIs, due to their size and global reach, are subject to more intensive supervision in AML/CFT to prevent their vast networks from being exploited for illicit finance. Regulators expect SIFIs to have highly robust, risk-based internal controls.

Global Impact of Weaknesses: A weakness in AML/CFT controls within a SIFI, even in a single subsidiary operating in a high-risk country, could potentially have a systemic impact across multiple jurisdictions due to the institution's interconnectedness.

Informing Internal Risk Assessments: SIFIs must consider the findings of national risk assessments (NRAs) in all the countries they operate in to inform their own enterprise-wide and customer-specific risk assessments.

Regulatory Prioritization: The SIFI label allows national and global regulators to prioritize resources and supervision on those institutions that pose the greatest potential risk to financial stability, including stability from financial crime vulnerabilities.

Data Sharing: The extensive international operations of SIFIs necessitate robust information-sharing mechanisms between public and private sectors, as well as between different national supervisors, to effectively manage cross-border ML/TF risks. 

In essence, SIFI identification highlights an institution's capacity to transmit financial shock (including from financial crime), making the management of country-specific AML/CFT risks a top priority for both the institution and global financial stability regulators. 

Those who read this, also read:

1. National Risk Assessment (NRA): India

2. National Risk Analysis (NRA)Framework