Basel III Liquidity MCQs: CAIIB BFM (Unit 18) Module B

Basel III Liquidity MCQs: CAIIB BFM (Unit 18) Module B. Mastering Basel III Liquidity Standards for the CAIIB BFM exam? Unit 18 focuses on crucial ratios like the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR), designed to make banks stronger. Practice these essential MCQs covering HQLA, ASF/RSF calculations, RBI guidelines, and key Basel III liquidity rules to ace your Module B test.

Unit 18: Basel-Ill Framework on Liquidity Standards: CAIIB MCQ BFM Module B – Attempt Now!

Question 1: What major event in 2008 showed that the existing financial rules like Basel II had problems?

A. Increase in global trade
B. Lehman Brothers collapse
C. Introduction of new technologies
D. Changes in government policies

Show Explanation

Correct Answer: B. Lehman Brothers collapse. The collapse of Lehman Brothers in 2008 was a significant event that exposed weaknesses in the existing financial regulations.

Question 2: One reason why Basel II did not work well was that banks had too much freedom in calculating what?

A. Interest rates
B. Customer deposits
C. Risk-Weighted Assets (RWA)
D. Employee salaries

Show Explanation

Correct Answer: C. Risk-Weighted Assets (RWA). Basel II allowed banks significant discretion in calculating RWA, which led to an underestimation of the actual risk.

Question 3: What is the main goal of the Basel III framework?

A. To decrease the profits of banks
B. To make the banking sector stronger and more able to handle problems
C. To encourage banks to take more risks
D. To simplify the process of opening new banks

Show Explanation

Correct Answer: B. To make the banking sector stronger and more able to handle problems. Basel III was introduced to fix the weaknesses of Basel II and build a more resilient banking sector.

Question 4: What is the minimum Capital Adequacy Ratio (CAR) that banks in India need to maintain according to Basel III?

A. 9%
B. 10%
C. 11.50%
D. 12%

Show Explanation

Correct Answer: C. 11.50%. Basel III increased the minimum CAR requirement in India to 11.50%.

Question 5: Basel III has set two levels for the Capital Adequacy Ratio (CAR). What happens when a bank’s CAR falls to 9%?

A. The bank is allowed to give more loans.
B. It starts supervisory risk mitigation measures.
C. It triggers Prompt Corrective Action (PCA).
D. The bank is declared bankrupt.

Show Explanation

Correct Answer: C. It triggers Prompt Corrective Action (PCA). A CAR of 9% triggers Prompt Corrective Action (PCA) under Basel III.

Question 6: How does Basel III try to make the calculation of Risk-Weighted Assets (RWA) more consistent across banks?

A. By allowing banks to use any model they prefer.
B. By increasing the use of internal models.
C. By limiting the use of internal models and setting minimum values.
D. By removing the concept of RWA altogether.

Show Explanation

Correct Answer: C. By limiting the use of internal models and setting minimum values. Basel III aims to reduce variability in RWA by restricting the use of internal models and setting floor values.

Question 7: Which approach does Basel III encourage banks to use more for calculating Credit Risk?

A. Internal Ratings-Based (IRB) Approach
B. Advanced Measurement Approach (AMA)
C. Standardised Approach
D. Operational Risk Approach

Show Explanation

Correct Answer: C. Standardised Approach. Basel III promotes the increased use of the Standardised Approach for Credit Risk calculation.

Question 8: What is the Leverage Ratio introduced by Basel III designed to prevent?

A. Low profits for banks
B. Excessive borrowing or leverage by banks
C. Too much focus on risk-based rules
D. A decrease in customer deposits

Show Explanation

Correct Answer: B. Excessive borrowing or leverage by banks. The Leverage Ratio is a non-risk-based measure to prevent banks from building up too much debt.

Question 9: What does the Liquidity Coverage Ratio (LCR) require banks to have enough of to handle a 30-day period of financial stress?

A. Gold reserves
B. High-Quality Liquid Assets (HQLA)
C. Long-term loans
D. Real estate holdings

Show Explanation

Correct Answer: B. High-Quality Liquid Assets (HQLA). The LCR requires banks to hold sufficient HQLA to survive a 30-day stress scenario.

Question 10: What does the Net Stable Funding Ratio (NSFR) focus on for banks?

A. Their ability to generate quick profits
B. The stability of their funding sources compared to their long-term assets
C. The number of branches they have
D. The amount of fees they charge to customers

Show Explanation

Correct Answer: B. The stability of their funding sources compared to their long-term assets. The NSFR aims to ensure banks have stable funding for their long-term assets.

Question 11: What are Risk-Weighted Assets (RWA)?

A. The total amount of money a bank has.
B. Bank assets that are assigned a weight based on how risky they are.
C. The profits a bank makes from its investments.
D. The number of employees working in a bank.

Show Explanation

Correct Answer: B. Bank assets that are assigned a weight based on how risky they are. RWA are used to calculate how much capital a bank needs to hold.

Question 12: What does the Capital Adequacy Ratio (CAR) measure for a bank?

A. The bank’s total profits.
B. The bank’s ability to absorb losses.
C. The number of customers the bank has.
D. The interest rates the bank charges.

Show Explanation

Correct Answer: B. The bank’s ability to absorb losses. CAR is the ratio of a bank’s capital to its risk-weighted assets, indicating its capacity to cover potential losses.

Question 13: What are Prompt Corrective Action (PCA) measures taken for?

A. To reward banks for good performance.
B. To take specific actions when a bank’s financial health falls below certain levels.
C. To encourage banks to take more risks.
D. To help customers get cheaper loans.

Show Explanation

Correct Answer: B. To take specific actions when a bank’s financial health falls below certain levels. PCA is triggered when a bank breaches regulatory thresholds like CAR.

Question 14: What kind of assets are considered High-Quality Liquid Assets (HQLA)?

A. Assets that are difficult to sell quickly.
B. Assets that can be easily and reliably converted into cash.
C. Assets with very high risk.
D. Assets that are not traded in active markets.

Show Explanation

Correct Answer: B. Assets that can be easily and reliably converted into cash. HQLA are crucial for a bank’s short-term liquidity.

Question 15: What is the main purpose of the Liquidity Coverage Ratio (LCR)?

A. To increase a bank’s lending activities.
B. To ensure banks have enough high-quality liquid assets to meet short-term obligations during stress.
C. To reduce the interest rates on loans.
D. To encourage banks to invest in risky assets.

Show Explanation

Correct Answer: B. To ensure banks have enough high-quality liquid assets to meet short-term obligations during stress. The LCR focuses on short-term liquidity resilience.

Question 16: At what level does the LCR initially apply to banks in India?

A. Only at the head office level.
B. At the stand-alone bank level, including overseas branches.
C. Only to foreign banks operating in India.
D. At the consolidated group level only.

Show Explanation

Correct Answer: B. At the stand-alone bank level, including overseas branches. Initially, LCR application was at the stand-alone level.

Question 17: What is the formula for calculating the Liquidity Coverage Ratio (LCR)?

A. (Total assets / Total liabilities) x 100
B. (Stock of HQLA / Total capital) x 100
C. (Stock of HQLA / Total net cash outflows over the next 30 days) x 100
D. (Total deposits / Total loans) x 100

Show Explanation

Correct Answer: C. (Stock of HQLA / Total net cash outflows over the next 30 days) x 100. This formula shows the proportion of liquid assets available to cover potential cash outflows.

Question 18: What is the minimum required Liquidity Coverage Ratio (LCR) that banks in India need to maintain?

A. 75%
B. 90%
C. 100%
D. 110%

Show Explanation

Correct Answer: C. 100%. The minimum required LCR became 100% effective from April 1, 2021.

Question 19: If a bank’s Liquidity Coverage Ratio (LCR) falls below 100%, what is the first thing it must do?

A. Immediately stop all lending activities.
B. Notify the Reserve Bank of India (RBI) and provide a plan to restore the LCR.
C. Ask customers to deposit more money.
D. Sell all its assets to raise cash.

Show Explanation

Correct Answer: B. Notify the Reserve Bank of India (RBI) and provide a plan to restore the LCR. This is a mandatory action when the LCR falls below the regulatory requirement.

Question 20: During a period of financial stress, are banks allowed to use their stock of High-Quality Liquid Assets (HQLA) even if it means their LCR might go below 100%?

A. No, they must always maintain an LCR of 100%.
B. Yes, but they must inform the Reserve Bank of India (RBI).
C. Yes, and they don’t need to inform anyone.
D. Only if the stress period lasts for more than 30 days.

Show Explanation

Correct Answer: B. Yes, but they must inform the Reserve Bank of India (RBI). Banks can use their HQLA during stress but need to notify RBI.

Question 21: Which of the following is NOT a characteristic of High-Quality Liquid Assets (HQLA)?

A. They can be easily sold for cash.
B. They have high credit and market risk.
C. Their value is easy to determine.
D. They are traded in active markets.

Show Explanation

Correct Answer: B. They have high credit and market risk. HQLA are defined by having low credit and market risk.

Question 22: High-Quality Liquid Assets (HQLA) are divided into different levels. Which level is considered the highest quality?

A. Level 1
B. Level 2A
C. Level 2B
D. Level 3

Show Explanation

Correct Answer: A. Level 1. Level 1 assets are considered the highest quality HQLA.

Question 23: What is the maximum percentage of Level 2 assets (Level 2A + Level 2B) that can be included in a bank’s total HQLA stock?

A. 15%
B. 40%
C. 50%
D. 60%

Show Explanation

Correct Answer: B. 40%. Level 2 assets combined cannot exceed 40% of the total HQLA.

Question 24: What is the maximum percentage of Level 2B assets that can be included in a bank’s total HQLA stock?

A. 10%
B. 15%
C. 25%
D. 40%

Show Explanation

Correct Answer: B. 15%. Level 2B assets alone cannot constitute more than 15% of the total HQLA.

Question 25: Under what condition can government securities held by a bank qualify as Level 1 HQLA?

A. If they are held to meet the minimum Statutory Liquidity Ratio (SLR) requirement.
B. If they are held above the minimum Statutory Liquidity Ratio (SLR) requirement.
C. If they are sold to another bank.
D. If they are used to provide loans to customers.

Show Explanation

Correct Answer: B. If they are held above the minimum Statutory Liquidity Ratio (SLR) requirement. Government securities held above the mandatory SLR qualify as Level 1 HQLA.

Question 26: Besides LCR and NSFR, what is the purpose of banks using other liquidity risk monitoring tools?

A. To increase their profits quickly.
B. To monitor liquidity risk in more detail.
C. To reduce the number of employees needeD.
D. To avoid following the rules set by Basel III.

Show Explanation

Correct Answer: B. To monitor liquidity risk in more detail. Banks use these tools to get a more comprehensive view of their liquidity risk.

Question 27: Which liquidity risk monitoring tool helps banks identify potential future funding problems by comparing when money is expected to come in and go out?

A. Concentration of Funding
B. Available Unencumbered Assets
C. Contractual Maturity Mismatch
D. LCR by Significant Currency

Show Explanation

Correct Answer: C. Contractual Maturity Mismatch. This tool focuses on the timing of cash inflows and outflows to detect gaps.

Question 28: What does the “Concentration of Funding” tool track?

A. The total amount of money a bank has.
B. How much a bank depends on major sources for its funding.
C. The number of customers a bank has.
D. The different types of loans a bank offers.

Show Explanation

Correct Answer: B. How much a bank depends on major sources for its funding. This helps in ensuring the bank’s funding is not overly reliant on a few sources.

Question 29: What are “Available Unencumbered Assets”?

A. Assets that have been promised as security for a loan.
B. Assets that are free from any legal claims and can be used as collateral.
C. Assets that a bank plans to sell in the future.
D. Assets that are not considered valuable.

Show Explanation

Correct Answer: B. Assets that are free from any legal claims and can be used as collateral. These assets can be used to obtain secured funding if needed.

Question 30: What specific type of liquidity mismatch does the “Liquidity Coverage Ratio (LCR) by Significant Currency” tool monitor?

A. Mismatches in the types of assets a bank holds.
B. Mismatches between the number of borrowers and lenders.
C. Mismatches in liquidity for different currencies the bank deals with.
D. Mismatches in the interest rates offered on deposits and loans.

Show Explanation

Correct Answer: C. Mismatches in liquidity for different currencies the bank deals with. This tool helps manage liquidity risks in various currencies.

Question 31: What kind of data do “Market-related Monitoring Tools” use to potentially predict liquidity problems early?

A. Historical data on customer transactions.
B. High-frequency market data like stock prices and credit spreads.
C. Information about the bank’s internal operations.
D. Government reports on economic growth.

Show Explanation

Correct Answer: B. High-frequency market data like stock prices and credit spreads. These market indicators can provide early warnings of potential liquidity stress.

Question 32: Which Basel III Liquidity Return (BLR) statement provides information about the Liquidity Coverage Ratio (LCR)?

A. BLR-2
B. BLR-3
C. BLR-1
D. BLR-4

Show Explanation

Correct Answer: C. BLR-1. BLR-1 is the statement specifically on the Liquidity Coverage Ratio (LCR).

Question 33: How often must banks submit the BLR-1 (Statement on Liquidity Coverage Ratio)?

A. Quarterly
B. Annually
C. Monthly
D. Bi-annually

Show Explanation

Correct Answer: C. Monthly. BLR-1 needs to be submitted every month.

Question 34: Within how many days after the end of the month must banks submit the BLR-2 (Statement of Funding Concentration)?

A. 7 days
B. 10 days
C. 15 days
D. 30 days

Show Explanation

Correct Answer: C. 15 days. BLR-2 has a submission deadline of 15 days after the month ends.

Question 35: How often is the BLR-3 (Statement of Available Unencumbered Assets) required to be submitted?

A. Monthly
B. Quarterly
C. Semi-annually
D. Annually

Show Explanation

Correct Answer: B. Quarterly. BLR-3 is submitted every quarter.

Question 36: What information is provided in the BLR-4 statement?

A. Details about funding concentration.
B. Information on available unencumbered assets.
C. Liquidity Coverage Ratio (LCR) for different significant currencies.
D. Other general information on liquidity.

Show Explanation

Correct Answer: C. Liquidity Coverage Ratio (LCR) for different significant currencies. BLR-4 focuses on currency-specific LCR.

Question 37: When did banks in India start disclosing their Liquidity Coverage Ratio (LCR) details?

A. From the financial year ending March 31, 2010.
B. From the financial year ending March 31, 2015.
C. From the financial year ending March 31, 2020.
D. From the financial year ending March 31, 2023.

Show Explanation

Correct Answer: B. From the financial year ending March 31, 2015. LCR disclosure became mandatory from this financial year.

Question 38: What is the main goal of the Net Stable Funding Ratio (NSFR)?

A. To ensure banks can make quick profits.
B. To make sure banks have a stable funding structure over a longer period (one year).
C. To encourage banks to rely more on short-term funding.
D. To reduce the amount of capital banks need to hold.

Show Explanation

Correct Answer: B. To make sure banks have a stable funding structure over a longer period (one year). NSFR focuses on long-term funding stability.

Question 39: At what levels does the NSFR apply to Indian banks?

A. Only at the individual bank level.
B. Only at the consolidated group level.
C. At both individual bank and consolidated group levels.
D. Only to foreign banks operating in India.

Show Explanation

Correct Answer: C. At both individual bank and consolidated group levels. NSFR has a broader application scope for Indian banks.

Question 40: What is the formula for calculating the Net Stable Funding Ratio (NSFR)?

A. (Total Assets / Total Liabilities) x 100
B. (Available Stable Funding / Required Stable Funding) x 100
C. (Liquid Assets / Total Assets) x 100
D. (Capital / Risk-Weighted Assets) x 100

Show Explanation

Correct Answer: B. (Available Stable Funding / Required Stable Funding) x 100. This formula compares the stable funding sources with the required stable funding for assets.

Question 41: What is the minimum acceptable Net Stable Funding Ratio (NSFR)?

A. 90%
B. 95%
C. 100%
D. 110%

Show Explanation

Correct Answer: C. 100%. The NSFR needs to be at least 100% to meet the regulatory requirement.

Question 42: When did the Net Stable Funding Ratio (NSFR) become effective in India?

A. October 1, 2020
B. April 1, 2021
C. October 1, 2021
D. April 1, 2022

Show Explanation

Correct Answer: C. October 1, 2021. This was the date when NSFR implementation became effective in India.

Question 43: How is Available Stable Funding (ASF) calculated?

A. By simply adding all of a bank’s capital and liabilities.
B. By applying different weights based on the expected stability of capital and liabilities over one year.
C. By looking at the bank’s profits from the previous year.
D. By counting only the deposits held for more than one year.

Show Explanation

Correct Answer: B. By applying different weights based on the expected stability of capital and liabilities over one year. ASF calculation involves weighting factors to reflect stability.

Question 44: What does Required Stable Funding (RSF) represent?

A. The total amount of money a bank needs to lend.
B. The amount of stable funding needed to support a bank’s assets and off-balance sheet exposures over one year.
C. The minimum capital a bank must holD.
D. The amount of liquid assets a bank must possess.

Show Explanation

Correct Answer: B. The amount of stable funding needed to support a bank’s assets and off-balance sheet exposures over one year. RSF reflects the funding needs based on asset liquidity.

Question 45: Do off-balance sheet exposures have any impact on the Required Stable Funding (RSF)?

A. No, only assets are considered for RSF.
B. Yes, a certain percentage is applied to their undrawn portions or notional amounts.
C. Yes, they are given a very high weighting factor.
D. Only if they are guaranteed by the government.

Show Explanation

Correct Answer: B. Yes, a certain percentage is applied to their undrawn portions or notional amounts. Off-balance sheet items also contribute to RSF.

Question 46: What does “Maturity Transformation” refer to in the context of banking?

A. The process of converting one currency to another.
B. The banking practice of using short-term deposits to fund long-term loans.
C. The changes in a bank’s organizational structure over time.
D. The adoption of new technologies in banking operations.

Show Explanation

Correct Answer: B. The banking practice of using short-term deposits to fund long-term loans. This is a core banking activity that also creates liquidity risk.

Question 47: If a bank has Available Stable Funding (ASF) of ₹1,500,000,000 and Required Stable Funding (RSF) of ₹1,200,000,000, what is its Net Stable Funding Ratio (NSFR)?

A. 80.00%
B. 125.00%
C. 92.31%
D. 115.00%

Show Explanation

Correct Answer: B. NSFR = (ASF / RSF) * 100% = (₹1,500,000,000 / ₹1,200,000,000) * 100% = 1.25 * 100% = 125.00%

Question 48: A bank possesses total regulatory capital of ₹600,000,000 and stable retail deposits of ₹400,000,000 with a weighting factor of 90%. Assuming these are the only sources of Available Stable Funding with non-zero weighting, what is the total Available Stable Funding (ASF)?

A. ₹600,000,000
B. ₹360,000,000
C. ₹960,000,000
D. ₹1,000,000,000

Show Explanation

Correct Answer: C. ASF = (Regulatory Capital * 1.00) + (Retail Deposits * 0.90) = (₹600,000,000 * 1.00) + (₹400,000,000 * 0.90) = ₹600,000,000 + ₹360,000,000 = ₹960,000,000

Question 49: A bank holds Cash Reserve Ratio (CRR) of ₹200,000,000 (weighting 0%) and other assets requiring a 50% Required Stable Funding (RSF) factor amounting to ₹500,000,000. What is the total Required Stable Funding (RSF)?

A. ₹200,000,000
B. ₹250,000,000
C. ₹700,000,000
D. ₹0

Show Explanation

Correct Answer: B. RSF = (CRR * 0.00) + (Other Assets * 0.50) = (₹200,000,000 * 0.00) + (₹500,000,000 * 0.50) = ₹0 + ₹250,000,000 = ₹250,000,000

Unit 18: Basel-Ill Framework on Liquidity Standards: CAIIB MCQ BFM Module B – Attempt Now!

Question 1: What major event in 2008 showed that the existing financial rules like Basel II had problems?

Question 2: One reason why Basel II did not work well was that banks had too much freedom in calculating what?

Question 3: What is the main goal of the Basel III framework?

Question 4: What is the minimum Capital Adequacy Ratio (CAR) that banks in India need to maintain according to Basel III?

Question 5: Basel III has set two levels for the Capital Adequacy Ratio (CAR). What happens when a bank’s CAR falls to 9%?

Question 6: How does Basel III try to make the calculation of Risk-Weighted Assets (RWA) more consistent across banks?

Question 7: Which approach does Basel III encourage banks to use more for calculating Credit Risk?

Question 8: What is the Leverage Ratio introduced by Basel III designed to prevent?

Question 9: What does the Liquidity Coverage Ratio (LCR) require banks to have enough of to handle a 30-day period of financial stress?

Question 10: What does the Net Stable Funding Ratio (NSFR) focus on for banks?

Question 11: What are Risk-Weighted Assets (RWA)?

Question 12: What does the Capital Adequacy Ratio (CAR) measure for a bank?

Question 13: What are Prompt Corrective Action (PCA) measures taken for?

Question 14: What kind of assets are considered High-Quality Liquid Assets (HQLA)?

Question 15: What is the main purpose of the Liquidity Coverage Ratio (LCR)?

Question 16: At what level does the LCR initially apply to banks in India?

Question 17: What is the formula for calculating the Liquidity Coverage Ratio (LCR)?

Question 18: What is the minimum required Liquidity Coverage Ratio (LCR) that banks in India need to maintain?

Question 19: If a bank’s Liquidity Coverage Ratio (LCR) falls below 100%, what is the first thing it must do?

Question 20: During a period of financial stress, are banks allowed to use their stock of High-Quality Liquid Assets (HQLA) even if it means their LCR might go below 100%?

Question 21: Which of the following is NOT a characteristic of High-Quality Liquid Assets (HQLA)?

Question 22: High-Quality Liquid Assets (HQLA) are divided into different levels. Which level is considered the highest quality?

Question 23: What is the maximum percentage of Level 2 assets (Level 2A + Level 2B) that can be included in a bank’s total HQLA stock?

Question 24: What is the maximum percentage of Level 2B assets that can be included in a bank’s total HQLA stock?

Question 25: Under what condition can government securities held by a bank qualify as Level 1 HQLA?

Question 26: Besides LCR and NSFR, what is the purpose of banks using other liquidity risk monitoring tools?

Question 27: Which liquidity risk monitoring tool helps banks identify potential future funding problems by comparing when money is expected to come in and go out?

Question 28: What does the “Concentration of Funding” tool track?

Question 29: What are “Available Unencumbered Assets”?

Question 30: What specific type of liquidity mismatch does the “Liquidity Coverage Ratio (LCR) by Significant Currency” tool monitor?

Question 31: What kind of data do “Market-related Monitoring Tools” use to potentially predict liquidity problems early?

Question 32: Which Basel III Liquidity Return (BLR) statement provides information about the Liquidity Coverage Ratio (LCR)?

Question 33: How often must banks submit the BLR-1 (Statement on Liquidity Coverage Ratio)?

Question 34: Within how many days after the end of the month must banks submit the BLR-2 (Statement of Funding Concentration)?

Question 35: How often is the BLR-3 (Statement of Available Unencumbered Assets) required to be submitted?

Question 36: What information is provided in the BLR-4 statement?

Question 37: When did banks in India start disclosing their Liquidity Coverage Ratio (LCR) details?

Question 38: What is the main goal of the Net Stable Funding Ratio (NSFR)?

Question 39: At what levels does the NSFR apply to Indian banks?

Question 40: What is the formula for calculating the Net Stable Funding Ratio (NSFR)?

Question 41: What is the minimum acceptable Net Stable Funding Ratio (NSFR)?

Question 42: When did the Net Stable Funding Ratio (NSFR) become effective in India?

Question 43: How is Available Stable Funding (ASF) calculated?

Question 44: What does Required Stable Funding (RSF) represent?

Question 45: Do off-balance sheet exposures have any impact on the Required Stable Funding (RSF)?

Question 46: What does “Maturity Transformation” refer to in the context of banking?

Question 47: If a bank has Available Stable Funding (ASF) of ₹1,500,000,000 and Required Stable Funding (RSF) of ₹1,200,000,000, what is its Net Stable Funding Ratio (NSFR)?

Question 48: A bank possesses total regulatory capital of ₹600,000,000 and stable retail deposits of ₹400,000,000 with a weighting factor of 90%. Assuming these are the only sources of Available Stable Funding with non-zero weighting, what is the total Available Stable Funding (ASF)?

Question 49: A bank holds Cash Reserve Ratio (CRR) of ₹200,000,000 (weighting 0%) and other assets requiring a 50% Required Stable Funding (RSF) factor amounting to ₹500,000,000. What is the total Required Stable Funding (RSF)?

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