Module: | MODULE B: RISK MANAGEMENT
Q316: Consider the following statements regarding the Supervisory Review Process under Pillar 2 of the Basel framework:
1. The Internal Capital Adequacy Assessment Process is primarily the responsibility of the bank's own management and board of directors.
2. The Supervisory Review and Evaluation Process is conducted internally by the bank's statutory auditors to certify its balance sheet.
3. Under Pillar 2, regulatory authorities possess the explicit power to require a bank to hold capital above the minimum Pillar 1 requirements.
Which of the statements given above is/are correct?
2. The Supervisory Review and Evaluation Process is conducted internally by the bank's statutory auditors to certify its balance sheet.
3. Under Pillar 2, regulatory authorities possess the explicit power to require a bank to hold capital above the minimum Pillar 1 requirements.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: The Internal Capital Adequacy Assessment Process (ICAAP) is an internal process.
The bank's management and board of directors are fundamentally responsible for establishing it to continually assess their capital adequacy in relation to their risk profile.
Statement 2 is incorrect: The Supervisory Review and Evaluation Process (SREP) is not an internal audit function.
It is the comprehensive review conducted by the external regulatory authority (e.g., the RBI) to evaluate the robustness of the bank's internal ICAAP.
Statement 3 is correct: A core principle of Pillar 2 is that supervisors have the legal authority and explicit power to intervene and require a bank to hold capital in excess of the Pillar 1 minimum (8%) if they determine the bank's risk profile warrants it.
The bank's management and board of directors are fundamentally responsible for establishing it to continually assess their capital adequacy in relation to their risk profile.
Statement 2 is incorrect: The Supervisory Review and Evaluation Process (SREP) is not an internal audit function.
It is the comprehensive review conducted by the external regulatory authority (e.g., the RBI) to evaluate the robustness of the bank's internal ICAAP.
Statement 3 is correct: A core principle of Pillar 2 is that supervisors have the legal authority and explicit power to intervene and require a bank to hold capital in excess of the Pillar 1 minimum (8%) if they determine the bank's risk profile warrants it.