UPSC Prelims Practice Questions — RBI chief lays down five key priorities for financial stability

Q1. With reference to banking regulation in India, consider the following measures: Which of the measures given above is/are macroprudential rather than microprudential in orientation?

  1. A higher capital charge imposed on a bank because its own loan portfolio carries a larger share of high-risk loans
  2. A capital buffer that banks must build up when aggregate credit in the economy grows excessively relative to GDP
  3. An additional common equity requirement imposed on banks that are assigned higher systemic-importance scores based on factors such as size and interconnectedness
  • A. 2 and 3 only
  • B. 1, 2 and 3
  • C. 1 only
  • D. 1 and 3 only

Q2. Suppose the RBI, observing a sharply widening credit-to-GDP gap, activates the countercyclical capital buffer (CCCB) for banks. Consider the following statements about the likely working of this measure: Which of the statements given above is/are correct?

  1. While the buffer is being built up, it tends to restrain excessive lending, because banks need more capital to support each new loan.
  2. In a later downturn, the RBI can release the buffer so that banks can absorb losses and keep credit flowing to the real economy.
  3. Once released, the capital can be freely paid out by banks as dividends, since the buffer requirement no longer applies to them.
  • A. 2 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q3. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. A financial system can be vulnerable to a crisis even when every individual institution in it meets its prudential capital requirements.
  2. Common exposures and interconnections among institutions can amplify a shock as it spreads, and an assessment of each institution in isolation would miss this.
  • 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

Q4. With reference to the Financial Stability Report (FSR) released by the Reserve Bank of India, consider the following statements: Which of the statements given above is/are correct?

  1. The FSR's assessment is confined to entities regulated by the RBI, since the securities, insurance and pension sectors fall under other regulators.
  2. The FSR's macro stress tests examine whether banks would still meet minimum capital requirements under hypothetical severe scenarios, rather than forecasting the most likely path of the economy.
  3. Network and contagion analysis used for the FSR estimates how the failure of one institution could pass losses to others through their mutual exposures.
  • A. 1 and 2 only
  • B. 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q5. Consider the following features of the RBI's Scale-Based Regulation (SBR) for NBFCs: NBFCs are placed in four layers based on their size, activity and perceived riskiness; NBFCs in the Upper Layer must maintain a Common Equity Tier 1 ratio of at least 9 per cent of risk-weighted assets; the Top Layer is ideally expected to remain empty and is populated only if the RBI sees a substantial increase in the potential systemic risk from specific Upper Layer NBFCs. Which of the following inferences can be drawn from the above?

  1. The framework scales the intensity of regulation to an NBFC's potential to transmit stress to the wider financial system.
  2. The RBI expects the bulk of the NBFC sector to face the most stringent tier of regulation.
  3. Moving to a proportionate framework implies an overall loosening of prudential standards for the largest NBFCs.
  • A. 1 and 3 only
  • B. 2 and 3 only
  • C. 1 and 2 only
  • D. 1 only

Q6. Consider the following statements: Which of the following is correct in respect of the above statements?

  1. Under the RBI's Scale-Based Regulation, a small NBFC can be moved into a more stringently regulated layer without any increase in its asset size.
  2. The ten largest eligible NBFCs by asset size always reside in the Upper Layer, irrespective of any other factor.
  • 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