Module: | Capital Adequacy, Basel Norms & Monetary Policy
Q13: Consider the following statements regarding the baseline capital ratios and Capital Conservation Buffer (CCB) mandated for commercial banks under the RBI Basel III framework:
1. The minimum Common Equity Tier 1 (CET1) capital and the minimum Tier 1 capital requirements are strictly mandated at 5.5% and 7.0% of Risk-Weighted Assets, respectively.
2. The Capital Conservation Buffer (CCB) is set at 2.5% of Risk-Weighted Assets and must consist entirely of Common Equity Tier 1 capital.
3. Banks are required to maintain a minimum Total Capital Ratio (CRAR) of 9.0%, which increases to a strict 11.5% when the mandatory Capital Conservation Buffer is fully incorporated.
4. The Capital Conservation Buffer can be maintained using a flexible combination of both Additional Tier 1 (AT1) capital and Tier 2 subordinated debt instruments.
Which of the statements given above is/are correct?
2. The Capital Conservation Buffer (CCB) is set at 2.5% of Risk-Weighted Assets and must consist entirely of Common Equity Tier 1 capital.
3. Banks are required to maintain a minimum Total Capital Ratio (CRAR) of 9.0%, which increases to a strict 11.5% when the mandatory Capital Conservation Buffer is fully incorporated.
4. The Capital Conservation Buffer can be maintained using a flexible combination of both Additional Tier 1 (AT1) capital and Tier 2 subordinated debt instruments.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Under the RBI Basel III framework, banks must maintain a minimum CET1 of 5.5% and a minimum Tier 1 capital of 7.0% of Risk-Weighted Assets (RWAs). Statement 2 is correct: The Capital Conservation Buffer (CCB) is mandated at exactly 2.5% of RWAs and must be met exclusively with Common Equity Tier 1 (CET1) capital.
Statement 3 is correct: The baseline minimum Total Capital Ratio (CRAR) is 9.0%, but banks must maintain an aggregate of 11.5% to satisfy both the CRAR and the 2.5% CCB requirements.
Statement 4 is incorrect: The CCB cannot be funded using Additional Tier 1 (AT1) or Tier 2 subordinated debt; regulatory guidelines explicitly restrict CCB composition to pure CET1 capital to ensure maximum loss absorbency.
Statement 3 is correct: The baseline minimum Total Capital Ratio (CRAR) is 9.0%, but banks must maintain an aggregate of 11.5% to satisfy both the CRAR and the 2.5% CCB requirements.
Statement 4 is incorrect: The CCB cannot be funded using Additional Tier 1 (AT1) or Tier 2 subordinated debt; regulatory guidelines explicitly restrict CCB composition to pure CET1 capital to ensure maximum loss absorbency.