Basel Norms — Set 6

Correct Answer: C. The number of customers entering a branch

The correct answer is 'The number of customers entering a branch'. Operational, credit, and market risks are calculated based on financial exposures, not physical footfall. Customer count does not directly translate into financial risk for capital requirement purposes. Basel norms focus on the riskiness of the bank's balance sheet items.

Correct Answer: A. Increasing its paid-up equity capital

Increasing capital (the numerator in the CAR formula) increases the overall ratio. More equity capital means a stronger buffer against losses. This improves the bank's health as measured by Basel standards.

Correct Answer: A. The range between the interest rate floor and ceiling

In the context of monetary policy used to support liquidity, the corridor is the range within which short-term interest rates fluctuate. It is usually defined by the Repo and Reverse Repo rates or the MSF rate. This helps maintain stable liquidity in the interbank market.

Correct Answer: C. By allowing supervisors to set specific capital for it if it is not covered in Pillar 1

IRRBB is the risk to a bank's capital and earnings from interest rate movements. Since Pillar 1 capital rules are standardized, Pillar 2 allows supervisors to add specific requirements for interest rate risk. This ensures a more holistic view of a bank's risk.

Correct Answer: C. Bank for International Settlements (BIS)

The correct answer is 'Bank for International Settlements (BIS)'. The BIS provides the secretariat for the Basel Committee. The secretariat is composed of professional staff seconded from member institutions. It assists the committee in technical research and administration.

Correct Answer: B. 28

As of current status, the committee has members from 28 jurisdictions. This includes countries like India, China, the US, and various European nations. It reflects the global nature of modern banking.

Correct Answer: C. 3%

Basel III prescribes a minimum Leverage Ratio of 3%. This means that for every 100 rupees of total exposure, the bank must have at least 3 rupees of Tier 1 capital. This ratio prevents banks from building up excessive off-balance sheet risks.

Correct Answer: A. Contingent liabilities like guarantees and letters of credit

Off-balance sheet items are obligations that do not appear on the formal balance sheet but represent a potential risk. Basel II and III introduced specific rules to convert these into 'credit equivalents' for capital calculation. This prevents banks from hiding risks outside their main accounts.

Correct Answer: B. Robust corporate governance and risk management culture

While Basel is famous for its numbers, it also emphasizes strong internal governance. Pillar 2 specifically looks at the quality of a bank's management and its internal risk assessment processes. Good governance is a primary defense against bank failure.

Correct Answer: B. Its decisions have no legal force and must be implemented by national laws

The committee relies on the commitment of its members to implement its standards in their own countries. Regulators around the world follow Basel norms to maintain their credibility in the global market. It functions as a coordinator of national regulatory policies.