Module: | MODULE B: RISK MANAGEMENT
Q447: Consider the following statements regarding the liquidity risk management of the overseas branches of Indian banks:
1. The overseas branches of Indian banks must comply exclusively with the Reserve Bank of India's liquidity regulations, legally ignoring any local host-country rules.
2. Host-country regulators frequently impose strict ring-fencing measures that require the foreign branch to maintain a dedicated local pool of liquid assets.
3. Ring-fencing ensures that the local branch possesses sufficient standalone liquidity to survive a localized crisis without relying entirely on cross-border funding from its Indian parent bank.
Which of the statements given above is/are correct?
2. Host-country regulators frequently impose strict ring-fencing measures that require the foreign branch to maintain a dedicated local pool of liquid assets.
3. Ring-fencing ensures that the local branch possesses sufficient standalone liquidity to survive a localized crisis without relying entirely on cross-border funding from its Indian parent bank.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is incorrect: Overseas branches of Indian banks operate under dual regulatory jurisdictions.
They are strictly prohibited from ignoring local laws.
They must comply with the host-country regulator's liquidity norms (such as local LCR requirements) while concurrently fulfilling the consolidated reporting requirements set by the Reserve Bank of India.
Statement 2 is correct: Following the 2008 financial crisis, host-country regulators globally enforce strict "ring-fencing" protocols.
These measures legally compel foreign branches to hold a dedicated, localized pool of High Quality Liquid Assets (HQLA) strictly within the host country's borders.
Statement 3 is correct: The explicit purpose of ring-fencing is self-sufficiency.
Host regulators want to ensure that the foreign branch has enough standalone liquidity to survive a local market shock independently, mitigating the contagion risk that arises if cross-border funding from the Indian parent bank is suddenly cut off.
They are strictly prohibited from ignoring local laws.
They must comply with the host-country regulator's liquidity norms (such as local LCR requirements) while concurrently fulfilling the consolidated reporting requirements set by the Reserve Bank of India.
Statement 2 is correct: Following the 2008 financial crisis, host-country regulators globally enforce strict "ring-fencing" protocols.
These measures legally compel foreign branches to hold a dedicated, localized pool of High Quality Liquid Assets (HQLA) strictly within the host country's borders.
Statement 3 is correct: The explicit purpose of ring-fencing is self-sufficiency.
Host regulators want to ensure that the foreign branch has enough standalone liquidity to survive a local market shock independently, mitigating the contagion risk that arises if cross-border funding from the Indian parent bank is suddenly cut off.