Directions (1-15): Read the following passage carefully and answer the questions given below it. Certain words/phrases have been printed in bold to help you to locate them while answering some of the questions.
The structure and operations of banks have undergone a rapid transformation in recent years. Consequent upon the revolution in information technology and the associated increase in competition financial intermediaries have become increasingly global in geographical coverage and universal in the financial operations, encompassing a wide
range of activities including banking, securities markets activities and insurance. In the face of widespread concerns about declining profitability of banks, the Basel capital adequacy norms were enacted.
range of activities including banking, securities markets activities and insurance. In the face of widespread concerns about declining profitability of banks, the Basel capital adequacy norms were enacted.
Although the Basel norms helped to arrest the erosion of banks, capital ratios, concerns were raised regarding the mere applicability of baseline capital ratios in the changed environment of operation. The blurring of both functional as well as national divisions among the financial intermediaries, and the speed and complexity of adjustment, made it difficult for regulators to keep up with the growing pace change. In particular, the rule of ‘one-size-fits-all’ aspect of the capital adequacy ratio was the subject of intense debate. Recent banking crisis only emphasized the point that baseline capital adequacy norms were not adequate to hedge against failures. In response to the same, the Basel Committee on Banks’ Supervision came out with the new Consultative Paper on Capital Adequacy. It invited suggestions from the policymakers, academia and other institutes all over the world. After taking into consideration manifold suggestions of the various organizations, the second Consultative Paper on Capital Adequacy was released.
The Accord rests on three pillars; the first pillar of minimum capital requirement, the second pillar of supervisory review process and the third pillar of market discipline. The first pillar sets out the minimum capital requirements. The new framework maintains both the current definition of capital and the minimum requirement of 8% of capital to risk-weighted assets. The revised Accord will be extended on a consolidation basis to holding companies of banking groups. The Accord stresses upon the improvement in measurement of risks. The credit risk measurement methods have been made more elaborate than those in the existing Accord. The new framework also emphasizes the measurement of operational risk. For measuring credit risk, two options have been proposed. The first is the standardized approach and the second is the internal rating based approach. Under the standardized approach, the existing approach for credit risk remains conceptually the same, but the risk-weights have been enlarged to encompass exposures to a broad category of borrowers with reference to the rating provided by rating agencies.
Q1. What necessitated the creation of Basel capital adequacy norms?
(a) To study the profitability pattern in the banks.
(b) The banks wanted its capital reserve ratios to be kept above 8%.
(c) Regulatory body of the banks wanted to have uniform policy.
(d) Corporate buyers compelled the lending institutions to do so.
(e) None of these
Q2. Which of the following factors are responsible for rapid transformation in banks in recent years?
(a) The forces of privatization and international players have compelled the banks to do so.
(b) Control from regulators has become meaningless for the banks to survive.
(c) Sudden upsurge in economy.
(d) The competition has increased and information technology has undergone a sea change.
(e) None of these
Q3. According to the passage activities encompassed by banks are:
(a) insurance, housing finance and low cost funds.
(b) market discipline, profit maximization and priority sector banking.
(c) securities markets, insurance and banking.
(d) geographical coverage, universalization and transformation.
(e) None of these
Q4. The main features of the standardized approach are:
(a) the credit risk management should encompass large corporate borrowers.
(b) the borrowers should not have more than 8% risk weighted assets.
(c) banks capital reserve ratios should be strictly maintained.
(d) the risk weights should take into consideration the rating of rating agencies.
(e) None of these
Q5. The consultative paper of Basel Committee was a result of:
(a) three pillar accord of academic institutes.
(b) contribution from international policy makers, academicians and institutions.
(c) failure of structures and operations of banks in the world.
(d) erosion of banks’ fixed assets owing to global competition.
(e) None of these
Q6. How did Basel norms help the Bank?
(a) It changed the environment of operations.
(b) The decline in capital ratios was arrested.
(c) The banks could successfully keep market discipline.
(d) It did not erode the quality of risk measurement.
(e) None of these
Q7. Emphasis on operational risk measurement was the main feature of:
(a) theory of three pillars risk management.
(b) first consultative paper on capital adequacy.
(c) second consultative paper on capital adequacy.
(d) Basel capital adequacy norms.
(e) None of these
Q8. Which of the following difficulties was faced by regulators on prescription of Basel norms?
(a) The regulators could not keep up with growing pace of change.
(b) There was no provision for risk measurement.
(c) The minimum requirement of 8% of capital could not be met.
(d) The supervisory review process could not be carried out.
(e) None of these
Q9. Which of the following is NOT a recommendation of second consultative paper on capital adequacy?
(a) The minimum capital requirement for a bank has been prescribed.
(b) Universal financial operations are permitted within limited geographical coverage.
(c) The supervisory review should be more comprehensive.
(d) The market discipline has to be observed by each bank.
(e) None of these
Q10. According to passage factor(s) responsible for declining profitability in banks was/were:
(A) cut-throat competition and technology revolution.
(B) globalization of financial intermediaries.
(C) privatization of insurance.
(a) Only (A)
(b) Only (B)
(c) Both (A) and (B)
(d) Both (B) and (C)
(e) Neither (A) nor (B)
Directions (11-13): Choose the word which is most similar in meaning to the word printed in bold as used in the passage.
Q11. Elaborate
(a) precise
(b) discernible
(c) explanatory
(d) enumerate
(e) implicit
Q12. Options
(a) alternatives
(b) distracters
(c) answers
(d) paths
(e) directions
Q13. Erosion
(a) longitude
(b) depletion
(c) assets
(d) replenishment
(e) reclamation
Directions (14-15): Choose the word which is most opposite in meaning to the word printed in bold as used in the passage.
Q14. Accord
(a) summit
(b) record
(c) disagreement
(d) difference
(e) withdrawal
Q15. Manifold
(a) single
(b) alone
(c) lonely
(d) isolated
(e) multiple
Solutions
S1. Ans.(e)
Sol. None of these
S2. Ans.(d)
Sol. The competition has increased and information technology has undergone a sea change.
Sol. securities markets, insurance and banking.
Sol. the credit risk management should encompass large corporate borrowers.
S5. Ans.(c)
Sol. failure of structures and operations of banks in the world.
Sol. The banks could successfully keep market discipline.
S7. Ans.(a)
Sol. theory of three pillars risk management.
S8. Ans.(a)
Sol. The regulators could not keep up with growing pace of change.S9. Ans.(b)
Sol. Universal financial operations are permitted within limited geographical coverage.
S10. Ans.(c)
Sol. Both (A) and (B)
S11. Ans.(c)
Sol. Elaborate- involving many carefully arranged parts or details; detailed and complicated in design and planning.
S12. Ans.(a)
Sol. Options and alternatives are similar in meaning.
S13. Ans.(b)
Sol. erosion-the process of eroding or being eroded by wind, water, or other natural agents.
depletion- reduction in the number or quantity of something.
S14. Ans.(c)
Sol. accord-an official agreement or treaty.
S15. Ans.(a)
Sol. manifold -many and various.
