Module: | MODULE B: RISK MANAGEMENT
Q267: Consider the following statements regarding the alignment of a bank's basic risk management framework with Basel and RBI prudential norms:
1. Establishing a robust risk management framework is a mandatory regulatory requirement under RBI guidelines, rather than an optional internal management exercise.
2. Strict adherence to Basel norms mathematically guarantees that a bank will never incur any operational or credit losses during a severe macroeconomic downturn.
3. Compliance with prudential norms ensures the bank maintains minimum capital adequacy and liquidity buffers to absorb systemic financial shocks.
Which of the statements given above is/are correct?
2. Strict adherence to Basel norms mathematically guarantees that a bank will never incur any operational or credit losses during a severe macroeconomic downturn.
3. Compliance with prudential norms ensures the bank maintains minimum capital adequacy and liquidity buffers to absorb systemic financial shocks.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: A formal Risk Management Framework is not a voluntary corporate governance choice; it is a strict statutory and regulatory mandate enforced by the Reserve Bank of India (RBI) and global Basel principles.
Statement 2 is incorrect: No regulatory framework, including Basel III/IV, can "mathematically guarantee" that a bank will never face losses.
Losses are an inherent part of the risk-taking business.
The framework simply ensures the bank is resilient enough to survive those losses without going bankrupt.
Statement 3 is correct: The primary objective of complying with prudential norms (like maintaining the Capital Adequacy Ratio (CAR) and Liquidity Coverage Ratio (LCR)) is to build mandatory financial buffers.
These buffers act as shock absorbers against unexpected macroeconomic or systemic failures.
Statement 2 is incorrect: No regulatory framework, including Basel III/IV, can "mathematically guarantee" that a bank will never face losses.
Losses are an inherent part of the risk-taking business.
The framework simply ensures the bank is resilient enough to survive those losses without going bankrupt.
Statement 3 is correct: The primary objective of complying with prudential norms (like maintaining the Capital Adequacy Ratio (CAR) and Liquidity Coverage Ratio (LCR)) is to build mandatory financial buffers.
These buffers act as shock absorbers against unexpected macroeconomic or systemic failures.