Module: | MODULE B: RISK MANAGEMENT
Q466: Scenario: Global Trust Bank relies heavily on a single large corporate depositor for 25 percent of its wholesale funding. The Reserve Bank of India is evaluating the bank's liquidity profile using the Concentration of Funding monitoring tool. Based on RBI guidelines, consider the following statements regarding the correct regulatory actions and assessments:
1. The bank's heavy reliance on a single counterparty increases its vulnerability to a sudden withdrawal, triggering a high concentration risk alert.
2. The monitoring tool requires the bank to track funding concentration exclusively by specific counterparties, ignoring product types or currencies.
3. A well-diversified funding base is encouraged by the regulator to mitigate the risk of systemic contagion during market stress.
Which of the statements given above is/are correct?
2. The monitoring tool requires the bank to track funding concentration exclusively by specific counterparties, ignoring product types or currencies.
3. A well-diversified funding base is encouraged by the regulator to mitigate the risk of systemic contagion during market stress.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: A 25 percent reliance on a single wholesale depositor represents severe concentration risk.
The primary function of this monitoring tool is to identify such vulnerabilities, where the sudden withdrawal of a massive deposit could precipitate a liquidity crisis for the bank.
Statement 2 is incorrect: The Concentration of Funding tool is comprehensive.
It mandates tracking concentration not only by significant counterparties but also by significant instruments, product types, and specific currencies.
It does not ignore these other vital dimensions.
Statement 3 is correct: Regulators heavily encourage a well-diversified funding base.
Over-reliance on specific wholesale markets or counterparties amplifies the risk of systemic contagion, where stress in one sector rapidly drains the bank's liquidity.
The primary function of this monitoring tool is to identify such vulnerabilities, where the sudden withdrawal of a massive deposit could precipitate a liquidity crisis for the bank.
Statement 2 is incorrect: The Concentration of Funding tool is comprehensive.
It mandates tracking concentration not only by significant counterparties but also by significant instruments, product types, and specific currencies.
It does not ignore these other vital dimensions.
Statement 3 is correct: Regulators heavily encourage a well-diversified funding base.
Over-reliance on specific wholesale markets or counterparties amplifies the risk of systemic contagion, where stress in one sector rapidly drains the bank's liquidity.