Basel Norms — Set 4
Banking · बेसल मानदंड · Questions 31–40 of 80
Which of the following assets generally carries a 'Zero Percent' risk weight under Basel norms?
Correct Answer: C. Government Securities (G-Secs)
Government securities are usually assigned a zero percent risk weight because they are considered risk-free. This means banks do not need to hold any extra capital against these investments. This encourages banks to invest in sovereign debt.
What happens if a bank fails to maintain its 'Market Discipline' disclosures under Pillar 3?
Correct Answer: D. Loss of market confidence and potential regulatory penalties
While disclosures are part of guidelines, regulatory authorities in each country can penalize banks for non-compliance. Lack of transparency often leads to higher borrowing costs for the bank in the interbank market. Pillar 3 relies on the market's ability to punish poorly managed banks.
Which version of the Basel norms first introduced 'Operational Risk'?
Correct Answer: D. Basel II
Basel II, finalized in 2004, was the first to recognize operational risk as a distinct category requiring capital. It defined operational risk as losses from internal failures or external events. This was a major advancement in risk management theory.
The 'Standardised Approach' and 'Internal Ratings-Based (IRB) Approach' are methods used to calculate risk for which pillar?
Correct Answer: B. Pillar 1
These are methods for calculating minimum capital requirements under Pillar 1. The Standardised Approach uses fixed risk weights, while the IRB approach allows banks to use their own models with regulatory approval. The IRB approach is generally used by larger, more sophisticated banks.
Under Basel III, what is the minimum 'Total Capital' ratio (including CCB) that a bank should aim for?
Correct Answer: B. 10.5%
The total capital requirement is 8% plus the 2.5% Capital Conservation Buffer, totaling 10.5%. Banks falling below this level face restrictions on distributions like dividends. In India, the target is higher due to the RBI's 9% base requirement.
Which of the following is NOT an objective of the Basel Committee?
Correct Answer: C. Fixing the exchange rate of the US Dollar
The Basel Committee focuses on the safety and soundness of banks, not on monetary policy or exchange rate fixing. Its goal is to prevent a global banking collapse by ensuring banks are properly capitalized. It provides a forum for cooperation between bank regulators.
The transition from 'undisclosed reserves' to 'disclosed reserves' in capital calculations is a shift toward which pillar?
Correct Answer: B. Pillar 3
This shift is a part of the market discipline encouraged by Pillar 3. Transparency is increased when reserves are clearly stated in financial reports. Disclosed reserves are part of the higher-quality Tier 1 capital.
In Basel terms, 'Credit Risk' is the risk arising from?
Correct Answer: C. A borrower's failure to repay a loan
Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. It is the most significant risk faced by traditional lending banks. Basel norms require specific capital set-asides based on this risk.
Which bank act provides the legal framework for the RBI to implement Basel norms in India?
Correct Answer: D. Banking Regulation Act, 1949
The Banking Regulation Act of 1949 gives the RBI the power to prescribe prudential norms for banks. This includes the authority to set capital adequacy standards based on international Basel accords. This act is the pillar of bank regulation in India.
The term 'Basal' is often misspelled; it refers to a city located in which European country?
Correct Answer: A. Switzerland
Basel (also spelled Basle) is the third-most-populous city in Switzerland. It is situated where the Swiss, French, and German borders meet. The city has been the headquarters of the Bank for International Settlements since 1930.