Module: | MODULE B: RISK MANAGEMENT
Q334: Scenario: XYZ Bank's management decides to transfer a large portfolio of deeply depreciated corporate bonds from its Trading Book (Held for Trading) to its Banking Book (Held to Maturity) to avoid recognizing daily mark-to-market losses during a severe market downturn.
Based on RBI guidelines regarding portfolio shifting, which of the following is the correct regulatory procedure?
✅ Correct Answer: B
The correct answer is B. RBI guidelines stipulate strict firewalls between the Trading Book (HFT/AFS) and the Banking Book (HTM). Banks cannot arbitrarily shift portfolios from the Trading Book to the Banking Book to avoid recognizing mark-to-market (MTM) losses during market downturns.
Such transfers are strictly prohibited under normal circumstances.
Any exceptional transfer (e.g., due to the total closure of a specific trading desk or a systemic regulatory change) requires explicit prior approval from the regulator (RBI). Option A is incorrect because Board approval alone is insufficient for such an accounting transfer.
Options C and D introduce fabricated exceptions that violate the core principle of preventing regulatory capital arbitrage.
Such transfers are strictly prohibited under normal circumstances.
Any exceptional transfer (e.g., due to the total closure of a specific trading desk or a systemic regulatory change) requires explicit prior approval from the regulator (RBI). Option A is incorrect because Board approval alone is insufficient for such an accounting transfer.
Options C and D introduce fabricated exceptions that violate the core principle of preventing regulatory capital arbitrage.