10. Basel Norms

Question 1

Why was the Basel Committee for Banking Supervision formed?

Answer 1

The Basel Committee for Banking Supervision was formed in 1974 in response to the failure of Herstatt Bank of Germany.

Question 2

Where is the headquarters of the Basel Committee for Banking Supervision located?

Answer 2

The headquarters of the Basel Committee for Banking Supervision is located in Basel.

Question 3

How many times has the Basel Committee provided Basel norms?

Answer 3

The Basel Committee has provided Basel norms three times: Basel I in 1998, Basel II in 2004, and Basel III in 2010.

Question 4

What is the latest Basel norm called, and when was it scheduled to be implemented?

Answer 4

The latest Basel norm is called Basel IV, and it was initially scheduled to be implemented from January 2022.

Question 5

Why was the implementation of Basel IV delayed?

Answer 5

The implementation of Basel IV was delayed until January 2023 due to the COVID-19 pandemic.

Question 6

What are risk-weighted assets?

Answer 6

Risk-weighted assets are the minimum capital requirement a bank must possess in relation to the risk profile of its lending activities and other assets.

Question 7

Why are risk-weighted assets important for banks?

Answer 7

Risk-weighted assets help banks mitigate the likelihood of insolvency and protect depositors by ensuring that they have sufficient capital to cover the risks they are exposed to.

Question 8

How are risk-weighted assets calculated?

Answer 8

Risk-weighted assets are calculated based on the risk assessment of each type of bank asset. Risk coefficients are assigned based on the credit ratings of specific asset categories.

Question 9

What is the purpose of risk-weighted asset regulations?

Answer 9

Risk-weighted asset regulations, outlined in Basel III, aim to establish international banking laws that promote good banking practices and ensure banks have adequate capital based on the risks they undertake.

Question 10

What are some key components of Basel norms?

Answer 10

Some key components of Basel norms include Capital Adequacy Ratio, Liquidity Coverage Ratio, Leverage Ratio, and Net Stable Funding Ratio.

Question 11

Are banks in India required to follow Basel norms?

Answer 11

Yes, in India, every bank is mandated to follow the Basel norms.

Question 12

What is Capital Adequacy Ratio (CAR)?

Answer 12

Capital Adequacy Ratio (CAR) is a ratio that ensures the stability, soundness, and strength of a financial institution by assessing its ability to withstand losses.

Question 13

What is the current requirement for maintaining CAR according to the RBI?

Answer 13

The current requirement for maintaining CAR, as stated by the RBI, is 9%. Out of this, 5.5% should be from Tier I capital, 1.5% from Additional Tier I capital, and 2% from Tier II capital.

Question 14

What are the consequences if a bank fails to maintain the required CAR?

Answer 14

If a bank fails to maintain the required CAR, it may come under the radar of the RBI and face Prompt Corrective Action (PCA), which includes restrictions such as no new hiring, no opening of new branches, and limitations on providing loans.

Question 15

How is the Capital Adequacy Ratio calculated?

Answer 15

The Capital Adequacy Ratio is calculated as (Total Unimpaired capital / Total risk-weighted assets) multiplied by 100.

Question 16

What is Total Unimpaired capital?

Answer 16

Total Unimpaired capital includes Tier I capital, Tier II capital, and Additional Tier I capital. Tier I represents permanent capital, Tier II represents non-permanent capital, and Additional Tier I represents semi-permanent capital in the form of convertible debentures.

Question 17

What is the significance of Total risk-weighted assets?

Answer 17

Total risk-weighted assets represent the expected loss of the bank and play a crucial role in determining the Capital Adequacy Ratio.

Question 18

How is the Leverage Ratio (LR) calculated?

Answer 18

The Leverage Ratio is calculated by dividing Tier 1 capital by the average total consolidated assets of the bank.

Question 19

What is the required Leverage Ratio for banks in India?

Answer 19

The Leverage Ratio needs to be maintained at 3.5% for all banks in India. However, for domestically systemic important banks, this ratio needs to be maintained at 4%.

Question 20

What does the Liquidity Coverage Ratio (LCR) measure?

Answer 20

The Liquidity Coverage Ratio measures the amount of highly liquid assets held by financial institutions to meet short-term obligations.

Question 21

What is the purpose of the Liquidity Coverage Ratio?

Answer 21

The Liquidity Coverage Ratio is designed to ensure that financial institutions have sufficient liquid assets to withstand short-term liquidity disruptions.

Question 22

What is required to meet the Liquidity Coverage Ratio?

Answer 22

Banks are required to hold a certain amount of highly liquid assets, such as cash or government bonds, that are equal to or greater than their net cash outflow over a 30-day period.

Question 23

What is the Net Stable Funding Ratio (NSFR)?

Answer 23

The Net Stable Funding Ratio is a ratio obtained by dividing the total available stable funding by the total required stable funding.

Question 24

How is the Net Stable Funding Ratio calculated?

Answer 24

The Net Stable Funding Ratio is calculated as (Total available stable funding / Total required stable funding).