Module: | MODULE B: RISK MANAGEMENT
Q471: Scenario: A bank pledges a portion of its Level 1 government securities as collateral for a secured borrowing transaction. The encumbrance period is strictly contracted for 15 months. The internal risk committee is assessing the NSFR impact. Based on RBI guidelines, consider the following statements regarding the correct regulatory actions:
1. The bank must assign a 100 percent Required Stable Funding (RSF) factor to these encumbered Level 1 securities.
2. The bank can continue to apply a 0 percent RSF factor because the underlying assets are sovereign government securities.
3. Assets encumbered for a period of one year or more completely lose their standard liquidity value in the structural NSFR calculation.
Which of the statements given above is/are correct?
2. The bank can continue to apply a 0 percent RSF factor because the underlying assets are sovereign government securities.
3. Assets encumbered for a period of one year or more completely lose their standard liquidity value in the structural NSFR calculation.
Which of the statements given above is/are correct?
✅ Correct Answer: B
The correct answer is B. Statement 1 is correct: According to the NSFR guidelines, any asset that is encumbered for a period of one year or more must automatically be assigned a 100 percent Required Stable Funding (RSF) factor, regardless of its underlying asset quality.
Statement 2 is incorrect: Even if the underlying asset is a highly liquid Level 1 sovereign government security, the act of encumbering it for 15 months negates its liquidity value.
It cannot receive the standard 0 percent RSF factor once it is locked up for more than a year.
Statement 3 is correct: The core principle of NSFR is that assets encumbered for one year or more are effectively locked and unavailable to the bank to meet any other obligations, completely losing their standard liquidity value in the structural calculation.
Statement 2 is incorrect: Even if the underlying asset is a highly liquid Level 1 sovereign government security, the act of encumbering it for 15 months negates its liquidity value.
It cannot receive the standard 0 percent RSF factor once it is locked up for more than a year.
Statement 3 is correct: The core principle of NSFR is that assets encumbered for one year or more are effectively locked and unavailable to the bank to meet any other obligations, completely losing their standard liquidity value in the structural calculation.