Module: | MODULE B: RISK MANAGEMENT
Q458: Consider the following statements regarding regulatory compliance and potential breaches of the Liquidity Coverage Ratio and Net Stable Funding Ratio limits:
1. If a bank's Liquidity Coverage Ratio drops below the mandated 100 percent threshold during a severe stress event, the bank must immediately notify the Reserve Bank of India.
2. The Reserve Bank of India strictly prohibits banks from utilizing their High Quality Liquid Assets pool if it causes the Liquidity Coverage Ratio to fall below 100 percent.
3. Persistent structural breaches of the Net Stable Funding Ratio limit may attract severe supervisory actions, including restrictions on the bank's future asset growth.
Which of the statements given above is/are correct?
2. The Reserve Bank of India strictly prohibits banks from utilizing their High Quality Liquid Assets pool if it causes the Liquidity Coverage Ratio to fall below 100 percent.
3. Persistent structural breaches of the Net Stable Funding Ratio limit may attract severe supervisory actions, including restrictions on the bank's future asset growth.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: The minimum LCR requirement is 100 percent.
However, the framework recognizes that during acute systemic stress, the ratio may temporarily drop below this threshold.
If a breach occurs, the bank must immediately notify the RBI and present a credible plan to restore the ratio.
Statement 2 is incorrect: The entire purpose of holding a buffer of High Quality Liquid Assets (HQLA) is to use it during a crisis.
The RBI does not prohibit banks from liquidating their HQLA pool to survive, even if such utilization drives the bank's LCR below the mandated 100 percent mark.
Survival supersedes technical ratio maintenance in an emergency.
Statement 3 is correct: The Net Stable Funding Ratio (NSFR) evaluates structural, long-term balance sheet health.
Persistent, uncorrected breaches of the 100 percent NSFR threshold indicate deep, systemic funding flaws.
In response, the RBI is empowered to impose severe supervisory penalties, including strictly capping the bank's ability to issue new loans or grow its asset base.
However, the framework recognizes that during acute systemic stress, the ratio may temporarily drop below this threshold.
If a breach occurs, the bank must immediately notify the RBI and present a credible plan to restore the ratio.
Statement 2 is incorrect: The entire purpose of holding a buffer of High Quality Liquid Assets (HQLA) is to use it during a crisis.
The RBI does not prohibit banks from liquidating their HQLA pool to survive, even if such utilization drives the bank's LCR below the mandated 100 percent mark.
Survival supersedes technical ratio maintenance in an emergency.
Statement 3 is correct: The Net Stable Funding Ratio (NSFR) evaluates structural, long-term balance sheet health.
Persistent, uncorrected breaches of the 100 percent NSFR threshold indicate deep, systemic funding flaws.
In response, the RBI is empowered to impose severe supervisory penalties, including strictly capping the bank's ability to issue new loans or grow its asset base.