Chapter 28: Capital Adequacy – Basel Norms (CAIIB – Paper 2)

1. What is the primary scope of application of Basel norms in India?

• A. Applicable only to private sector banks
• B. Applicable only to foreign banks
• C. Applicable to all commercial banks including foreign banks operating in India
• D. Applicable only to co-operative banks

In India, Basel norms apply to all scheduled commercial banks, including public, private, and foreign banks. Regional rural banks and cooperative banks are currently outside the full scope.

2. According to RBI guidelines, which type of banks are not directly covered under Basel framework?

• A. Regional Rural Banks (RRBs)
• B. Public Sector Banks
• C. Private Sector Banks
• D. Foreign Banks

Basel guidelines are mandatory for commercial banks, but Regional Rural Banks (RRBs) and cooperative banks are not directly under the Basel framework in India.

3. The Basel norms are applicable at which level of banking operations?

• A. Only at branch level
• B. Only at head office level
• C. Only at international operations level
• D. Both consolidated (global) and solo (individual bank) level

Basel norms are applied on both consolidated basis (covering global operations of the bank) and on a solo basis for individual banks to ensure uniform risk management and capital adequacy.

4. Which of the following statements is TRUE regarding scope of Basel application in India?

• A. Basel norms are optional for commercial banks
• B. Basel norms are mandatory for all scheduled commercial banks
• C. Basel norms are applicable only to NBFCs
• D. Basel norms apply only to foreign exchange transactions

RBI mandates Basel framework compliance for all scheduled commercial banks to maintain international standards in capital adequacy and risk management.

5. Why are Basel norms applied at both consolidated and solo levels?

• A. To capture risks of the entire banking group as well as individual entities
• B. To avoid duplication of capital measurement
• C. To exempt foreign branches from capital requirements
• D. To reduce regulatory reporting burden

Basel requires application at consolidated level to assess risks of the banking group and at solo level to ensure each entity within the group has adequate capital, preventing regulatory arbitrage.

6. What is the minimum Capital to Risk-weighted Assets Ratio (CRAR) prescribed by RBI under Basel III for Indian banks?

• A. 8%
• B. 9.5%
• C. 10%
• D. 9%

Basel Committee recommends a minimum CRAR of 8%, but RBI mandates a stricter requirement of 9% for Indian banks to provide additional safety.

7. Which of the following is not a risk type covered under Pillar 1 minimum capital requirements?

• A. Credit Risk
• B. Market Risk
• C. Reputational Risk
• D. Operational Risk

Pillar 1 covers Credit Risk, Market Risk, and Operational Risk. Other risks such as liquidity, reputational, and strategic risks are addressed under Pillar 2.

8. Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital requirement as a percentage of RWA?

• A. 5.5%
• B. 4%
• C. 6.5%
• D. 7%

RBI requires Indian banks to maintain a minimum CET1 ratio of 5.5% of risk-weighted assets, higher than the Basel minimum of 4.5%.

9. A bank has risk-weighted assets of ₹1,000 crore. To meet RBI’s minimum CRAR of 9%, how much total capital should the bank maintain?

• A. ₹80 crore
• B. ₹90 crore
• C. ₹100 crore
• D. ₹95 crore

CRAR = Capital / Risk-weighted Assets. For ₹1,000 crore RWA, at 9% CRAR, required capital = ₹1,000 × 9% = ₹90 crore.

10. Which of the following capital instruments is included in Tier 1 capital?

• A. Subordinated debt
• B. Revaluation reserves
• C. Paid-up equity capital
• D. Hybrid instruments

Tier 1 capital mainly includes paid-up equity capital, statutory reserves, disclosed free reserves, and instruments meeting Basel criteria. Subordinated debt and revaluation reserves fall under Tier 2.

11. What is the main objective of Pillar 2 under Basel framework?

• A. To ensure banks have adequate capital for all risks, including those not fully captured under Pillar 1
• B. To prescribe a uniform CRAR of 9%
• C. To standardize credit rating models globally
• D. To calculate market risk capital requirement

Pillar 2 emphasizes supervisory review, requiring banks to maintain capital for all material risks, including those not covered under Pillar 1 (e.g., interest rate risk in banking book, liquidity risk).

12. Which of the following is the core component of Pillar 2?

• A. Market Discipline
• B. Minimum Capital Requirement
• C. Risk-weighted asset computation
• D. Internal Capital Adequacy Assessment Process (ICAAP)

ICAAP is the central element of Pillar 2, where banks themselves assess their capital adequacy against all material risks and submit reports to regulators for review.

13. Under Pillar 2, banks are expected to conduct ICAAP at which frequency?

• A. Once every three years
• B. At least annually
• C. Once in five years
• D. Only when directed by RBI

RBI requires banks to conduct ICAAP at least annually to ensure their capital planning and risk management are aligned with current and projected risk exposures.

14. Which of the following risks are specifically highlighted for supervisory review under Pillar 2?

• A. Credit, market, and operational risk only
• B. Only liquidity risk
• C. Interest rate risk in banking book, liquidity risk, reputational and strategic risks
• D. Only forex risk

Pillar 2 requires banks to hold capital against risks not fully covered in Pillar 1, such as interest rate risk in the banking book, liquidity, reputational, and strategic risks.

15. The Supervisory Review and Evaluation Process (SREP) under Pillar 2 empowers the regulator to:

• A. Determine foreign exchange exposure of banks
• B. Prescribe standard credit rating models
• C. Issue guidelines for minimum CRAR
• D. Require banks to hold additional capital beyond the minimum if necessary

SREP allows regulators to assess ICAAP submissions, risk profile, governance, and may require banks to maintain higher capital than the minimum if their risk profile demands it.

16. What is the primary objective of Pillar 3 under Basel framework?

• A. To impose capital buffers on banks
• B. To promote transparency through disclosure requirements
• C. To prescribe ICAAP for banks
• D. To calculate credit risk capital charge

Pillar 3 focuses on market discipline by requiring banks to make detailed disclosures of their risk profile, capital adequacy, and risk management practices to promote transparency.

17. Which of the following is a key feature of Pillar 3 disclosure requirements?

• A. Disclosures are optional for small banks
• B. Disclosures only include profit and loss statement
• C. Banks must publish both qualitative and quantitative information on risks and capital
• D. Only internal auditors can access Pillar 3 disclosures

Pillar 3 requires banks to disclose qualitative information (e.g., risk management policies) and quantitative data (e.g., risk exposures, capital ratios) to ensure transparency.

18. Under RBI guidelines, how frequently are Indian banks required to make Pillar 3 disclosures?

• A. Quarterly and annually
• B. Monthly
• C. Only once in a financial year
• D. Only when directed by RBI

RBI requires banks to make quarterly disclosures (mainly capital adequacy and risk exposure details) and detailed annual disclosures under Pillar 3.

19. Which of the following stakeholders benefit the most from Pillar 3 disclosures?

• A. Only bank employees
• B. Only regulators
• C. Only borrowers
• D. Investors, regulators, analysts, and the general public

Pillar 3 disclosures enhance transparency and allow investors, regulators, analysts, and the public to assess a bank’s financial strength and risk profile.

20. Which of the following information is not typically disclosed under Pillar 3 requirements?

• A. Capital adequacy ratios
• B. Detailed individual customer account balances
• C. Credit risk exposures by portfolio
• D. Risk management objectives and policies

Pillar 3 requires banks to disclose risk exposures, capital adequacy, and risk management practices. Individual customer account balances are confidential and never disclosed.

21. What is the minimum Capital Conservation Buffer (CCB) prescribed by RBI under Basel III?

• A. 1%
• B. 2%
• C. 2.5%
• D. 3%

RBI requires banks to maintain a Capital Conservation Buffer of 2.5% of risk-weighted assets, in addition to the minimum capital requirement.

22. What is the purpose of the Capital Conservation Buffer (CCB)?

• A. To build up capital during good times that can be used during stress periods
• B. To replace Tier 1 capital requirements
• C. To provide liquidity for day-to-day operations
• D. To reduce credit rating requirements

The CCB ensures that banks build up additional capital in normal times, which can be drawn down in periods of financial/economic stress.

23. What is the range of the Countercyclical Capital Buffer (CCyB) that RBI may impose?

• A. 0.25% to 0.75% of RWA
• B. 1% to 2%
• C. 2% to 3%
• D. 0% to 2.5% of RWA

RBI has the discretion to activate the Countercyclical Capital Buffer in the range of 0% to 2.5% of risk-weighted assets, depending on credit growth and systemic risk conditions.

24. Which condition typically triggers the activation of Countercyclical Capital Buffer (CCyB)?

• A. High NPA levels in the banking system
• B. Excessive credit growth leading to systemic risk
• C. Decline in GDP growth rate
• D. Increase in bank profitability

The CCyB is activated when there is excessive credit growth in the economy, which could pose systemic risks. It ensures banks hold extra capital to absorb potential losses.

25. If a bank’s CET1 ratio falls within the Capital Conservation Buffer range, what restriction is applied?

• A. Restriction on dividend distribution and bonus payments
• B. Ban on opening new branches
• C. Suspension of lending activities
• D. Mandatory merger with stronger banks

When CET1 falls within the CCB range, banks face restrictions on capital distributions such as dividends, share buybacks, and bonuses to ensure capital conservation.