Module: | MODULE B: RISK MANAGEMENT
Q431: Scenario: Beta Bank has issued ₹1,000 crore in financial bank guarantees for a large telecom company. Due to a sudden regulatory penalty, the telecom company goes bankrupt, and the government instantly invokes the guarantees. Based on liquidity management norms, consider the following statements regarding the impact on the bank:
1. The sudden crystallization of these contingent liabilities is a classic example of Call Risk.
2. The bank must instantly honor the guarantees, causing an immediate cash outflow that bypasses standard maturity buckets.
3. Since these guarantees were off-balance sheet items, the bank is legally exempt from honoring them during a systemic liquidity crisis.
Which of the statements given above is/are correct?
2. The bank must instantly honor the guarantees, causing an immediate cash outflow that bypasses standard maturity buckets.
3. Since these guarantees were off-balance sheet items, the bank is legally exempt from honoring them during a systemic liquidity crisis.
Which of the statements given above is/are correct?
✅ Correct Answer: A
The correct answer is A. Statement 1 is correct: Call Risk is the specific risk that arises when contingent liabilities (such as issued Letters of Credit or Bank Guarantees) unexpectedly crystallize.
The sudden bankruptcy of the telecom company triggered this exact Call Risk scenario.
Statement 2 is correct: When a guarantee is invoked, the liability shifts from contingent to actual.
Beta Bank must instantly honor the ₹1,000 crore payment, resulting in a massive, immediate cash outflow that totally bypasses the bank's planned structural maturity buckets.
Statement 3 is incorrect: Bank guarantees are legally binding commitments.
The fact that they initially sit off-balance sheet provides absolutely no legal exemption from payment when invoked.
Beta Bank is contractually and regulatorily mandated to honor the guarantee, even during a severe systemic liquidity crunch.
The sudden bankruptcy of the telecom company triggered this exact Call Risk scenario.
Statement 2 is correct: When a guarantee is invoked, the liability shifts from contingent to actual.
Beta Bank must instantly honor the ₹1,000 crore payment, resulting in a massive, immediate cash outflow that totally bypasses the bank's planned structural maturity buckets.
Statement 3 is incorrect: Bank guarantees are legally binding commitments.
The fact that they initially sit off-balance sheet provides absolutely no legal exemption from payment when invoked.
Beta Bank is contractually and regulatorily mandated to honor the guarantee, even during a severe systemic liquidity crunch.