Module: | MODULE B: RISK MANAGEMENT
Q325: Scenario: An Indian commercial bank reports a total Capital to Risk-Weighted Assets Ratio (CRAR) of 10.5 percent, comprising 8.0 percent Tier 1 capital and 2.5 percent Tier 2 capital. Based on the Basel III Capital Conservation Buffer (CCB) guidelines as applied by the RBI, consider the following statements regarding the regulatory status of this bank:
1. The bank has successfully met the baseline absolute minimum CRAR requirement of 9.0 percent.
2. The bank has breached the mandatory 2.5 percent Capital Conservation Buffer threshold.
3. The regulator will immediately force the bank into liquidation due to this buffer breach.
Which of the statements given above is/are correct?
2. The bank has breached the mandatory 2.5 percent Capital Conservation Buffer threshold.
3. The regulator will immediately force the bank into liquidation due to this buffer breach.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: The baseline absolute minimum CRAR mandated by the RBI for Indian banks is 9.0%. Since the bank holds 10.5% total capital, it successfully complies with this fundamental requirement and remains solvent.
Statement 2 is correct: In addition to the 9.0% baseline, banks must hold a 2.5% Capital Conservation Buffer (CCB), pushing the optimal total requirement to 11.5%. Because the bank only has 10.5%, it falls short of the 11.5% target, meaning it has officially dipped into and breached its CCB threshold.
Statement 3 is incorrect: The CCB is explicitly designed to be drawn down during periods of stress without triggering insolvency.
A breach of the CCB does not result in immediate liquidation or closure of the bank.
Instead, the regulatory consequence is an automatic restriction on discretionary distributions, meaning the bank will be prohibited from paying out shareholder dividends, initiating share buybacks, or distributing discretionary staff bonuses until the buffer is rebuilt.
Statement 2 is correct: In addition to the 9.0% baseline, banks must hold a 2.5% Capital Conservation Buffer (CCB), pushing the optimal total requirement to 11.5%. Because the bank only has 10.5%, it falls short of the 11.5% target, meaning it has officially dipped into and breached its CCB threshold.
Statement 3 is incorrect: The CCB is explicitly designed to be drawn down during periods of stress without triggering insolvency.
A breach of the CCB does not result in immediate liquidation or closure of the bank.
Instead, the regulatory consequence is an automatic restriction on discretionary distributions, meaning the bank will be prohibited from paying out shareholder dividends, initiating share buybacks, or distributing discretionary staff bonuses until the buffer is rebuilt.