UPSC Prelims Practice Questions — SC voids Yes Bank’s $883 mn AT-1 bond write-off
Q1. Under RBI's Basel III capital rules, bank capital instruments can carry two kinds of loss-absorption trigger: a pre-specified Common Equity Tier-1 (CET1) trigger and a Point of Non-Viability (PONV) trigger. Which one of the following correctly distinguishes them?
- A. The PONV trigger permits only a temporary write-down, whereas the CET1 trigger permits only conversion into equity
- B. The PONV trigger applies to Tier-2 as well as AT1 instruments, whereas the CET1 trigger is a feature of AT1 instruments
- C. The PONV trigger is invoked by the issuing bank's board, whereas the CET1 trigger can be invoked only by the RBI
- D. The PONV trigger applies only to AT1 instruments, whereas the CET1 trigger applies to Tier-2 instruments as well
Q2. Consider the following statements: Which of the following is correct in respect of the above statements?
- In the 2020 reconstruction of Yes Bank, holders of its Additional Tier-1 bonds suffered a complete write-off, while its existing equity shareholders were not wiped out.
- Under the Basel III framework, Additional Tier-1 instruments are designed to absorb a bank's losses before its common equity does.
- A. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
- B. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
- C. Statement-I is correct, but Statement-II is incorrect
- D. Statement-I is incorrect, but Statement-II is correct
Q3. Consider the following facts about a bank's rescue: under the reconstruction scheme, the bank's Additional Tier-1 (AT1) instruments were written down permanently and in full; existing shareholders kept their shares, subject to a three-year lock-in on 75% of them; and an investor bank subscribed to fresh equity so that it would hold 49% of the reconstructed bank after the infusion. Which of the following inferences can be drawn from the above?
- The write-down was valid because AT1 terms allow a write-down at any time, irrespective of the bank's capital position.
- The scheme departed from the usual ordering in which shareholders absorb losses ahead of AT1 holders.
- The percentage stake of the pre-existing shareholders would necessarily have fallen after the fresh equity infusion.
- A. 1 and 2 only
- B. 1, 2 and 3
- C. 2 and 3 only
- D. 3 only
Q4. With reference to the protection available to different claimants on a bank in India, consider the following statements: Which of the statements given above is/are correct?
- A bank that issues Additional Tier-1 instruments to retail investors must clearly explain their loss-absorbency features to them and obtain their sign-off.
- Holders of a bank's Additional Tier-1 bonds are covered by deposit insurance up to the insured limit, since they are creditors of the bank.
- The deposit insurance limit is applied per depositor, not separately to each account the depositor holds in the same bank.
- A. 2 and 3 only
- B. 1 only
- C. 1, 2 and 3
- D. 1 and 3 only
Q5. Consider the following assertion: 'Additional Tier-1 bonds of a bank offer investors a higher return than its senior bonds.' Which of the following statements support the above assertion?
- They can be written down or converted into equity when the bank's Common Equity Tier-1 ratio falls to a pre-specified trigger.
- The issuing bank has full discretion to cancel coupon payments on them.
- They have no fixed maturity date on which the investor can demand repayment.
- Banks may issue them to retail investors with the approval of their Board.
- A. 1, 2 and 3 only
- B. 2, 3 and 4 only
- C. 1 and 2 only
- D. 1, 2, 3 and 4
Q6. The 2020 scheme under which a failing private sector bank was rescued with fresh equity from State Bank of India, and its Additional Tier-1 instruments written down, drew its statutory authority from which one of the following?
- A. SARFAESI Act, 2002
- B. Reserve Bank of India Act, 1934
- C. Banking Regulation Act, 1949
- D. Insolvency and Bankruptcy Code, 2016