Basel Norms — Set 3
Banking · बेसल मानदंड · Questions 21–30 of 80
The Basel norms are considered as?
Correct Answer: D. Voluntary guidelines and recommendations
Basel norms are guidelines and are not legally binding on their own. Individual countries must pass their own laws or regulations to implement them. Most major economies adopt them to ensure their banks are globally competitive and safe.
Which of the following describes 'Market Risk' as defined in Basel II?
Correct Answer: D. Risk of loss due to changes in market prices
Market risk is the risk of losses in on-balance sheet and off-balance sheet positions arising from movements in market prices. This includes changes in interest rates, stock prices, and foreign exchange rates. Basel II requires banks to hold capital specifically against these risks.
What is the 'Common Equity Tier 1' (CET1) ratio requirement under Basel III?
Correct Answer: A. 4.5%
Basel III mandates a minimum CET1 ratio of 4.5%. CET1 is the highest quality of capital, mostly consisting of common shares and retained earnings. It is the primary measure of a bank's strength used by investors and regulators.
In India, the transition to Basel III was completed in which year (after various extensions)?
Correct Answer: A. 2021
India initially planned a phased implementation but the final deadline for full Basel III compliance was extended to 2021 due to economic conditions. The RBI issues detailed master circulars to guide banks through this transition. All Indian commercial banks are now expected to follow these norms.
Which of the following is NOT one of the 'G-SIBs' often discussed in Basel III regulations?
Correct Answer: B. Government Savings and Investment Boards
G-SIBs are large banks whose failure would cause significant disruption to the global financial system. The Basel Committee applies higher capital requirements to these banks. 'Government Savings and Investment Boards' is not a term used in the Basel framework.
The Basel Committee was established by central bank governors of which group of countries?
Correct Answer: A. G10
The committee was formed by the governors of the G10 countries in late 1974. This was a response to disruptions in international currency and banking markets. Today, the membership has expanded to include 28 jurisdictions.
What is the primary purpose of 'Haircuts' in banking collateral, relevant to Basel calculations?
Correct Answer: B. A percentage reduction in the market value of collateral to account for risk
A haircut is the difference between the market value of an asset and the value attributed to it as collateral. Basel norms specify how these haircuts should be applied based on the volatility of the asset. Higher risk assets receive larger haircuts to ensure safety.
Under Basel III, 'External Credit Rating' is often used to determine the risk weight of which assets?
Correct Answer: D. Corporate loans and bonds
External ratings from agencies like CRISIL or Moody's are used to decide the risk weight for corporate exposures. Higher-rated corporates attract lower risk weights, requiring less capital from the bank. This aligns capital requirements with the actual probability of default.
Which document is issued by the RBI to implement Basel norms in India?
Correct Answer: D. Master Circular on Prudential Norms
The RBI issues Master Circulars that provide comprehensive instructions on Basel implementation for Indian banks. These circulars detail the calculation of capital, risk weights, and disclosure requirements. Banks are legally required to comply with these RBI directives.
The Basel III Leverage Ratio is intended to be a backstop to which pillar?
Correct Answer: C. Pillar 1
The Leverage Ratio serves as a non-risk-based backstop to the risk-based capital requirements of Pillar 1. It prevents banks from using internal models to excessively lower their risk-weighted assets. It ensures a minimum level of capital regardless of risk assessments.