Module: | MODULE B: RISK MANAGEMENT
Q301: Consider the following statements regarding the primary necessities and goals of risk-based regulation in the banking industry:
1. The primary objective is to maximize shareholder wealth by allowing banks to take unhedged exposures.
2. It aims to protect uninformed depositors and mitigate the moral hazard associated with deposit insurance schemes.
3. It ensures that the capital held by a bank is directly proportionate to its actual risk profile, thereby preventing systemic contagion.
Which of the statements given above is/are correct?
2. It aims to protect uninformed depositors and mitigate the moral hazard associated with deposit insurance schemes.
3. It ensures that the capital held by a bank is directly proportionate to its actual risk profile, thereby preventing systemic contagion.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: The goal of banking regulation is not to maximize shareholder wealth or encourage unhedged risk-taking, but to ensure systemic stability.
Statement 2 is correct: Regulation is essential to protect uninformed depositors who cannot assess a bank's risk.
It also mitigates 'moral hazard', which occurs when banks take excessive risks knowing that deposit insurance or government bailouts will cover their losses.
Statement 3 is correct: A fundamental goal of risk-based regulation, such as the Basel Accords, is to ensure that the regulatory capital a bank holds is directly commensurate with its actual risk profile (credit, market, and operational), thereby preventing the failure of one institution from triggering a systemic contagion across the broader economy.
Statement 2 is correct: Regulation is essential to protect uninformed depositors who cannot assess a bank's risk.
It also mitigates 'moral hazard', which occurs when banks take excessive risks knowing that deposit insurance or government bailouts will cover their losses.
Statement 3 is correct: A fundamental goal of risk-based regulation, such as the Basel Accords, is to ensure that the regulatory capital a bank holds is directly commensurate with its actual risk profile (credit, market, and operational), thereby preventing the failure of one institution from triggering a systemic contagion across the broader economy.