Systemically important financial institutions and drivers of systemic risk: Evidence from India

The aim of this study is twofold: (1) identify the systemically important financial institutions in India and their contributing role to Indian systemic risk during various global and domestic events; and (2) uncover the factors driving systemic risk in Indian financial institutions. To serve the first aim, we estimate financial institutions' involvement in the overall risk of the Indian financial market using the component expected shortfall approach. The results show that the State Bank of India, ICICI Bank, HDFC Bank, and HDFC Ltd. contribute more than 50% to the aggregate risk in India, demonstrating a significant systemic risk concentration. These financial institutions are also referred to as domestic systemically important banks (D-SIBs) by the Reserve Bank of India (the central bank in India). Financial institutions show an increased contribution to overall systemic risk after the systemic events considered in the study. Furthermore, results indicate that banks play a dominating role in contributing to systemic risk in India; however, the analysis also indicates the increasing contribution of non-banking financial companies and insurance firms to the gross risk of the Indian financial market in recent years. To serve the second aim, we apply panel data regressions and show that the probability of default, leverage, loan, liquidity, board size, and Basel norms are significant drivers of systemic risk. Besides the importance of our findings for investment and risk management decisions during crisis periods, our findings have implications for policymakers overseeing the financial system in India, assessing potential vulnerabilities and designing prudential regulatory and action plans to maintain financial stability.