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CS Professional · Banking and Insurance - Laws and Practice · Risk Management in Banks and Basel Accords

Narmada Bank's CET1 ratio is 7.5% of RWA. Under RBI's Basel III norms, the minimum CET1 is 5.5% and the capital conservation buffer (CCB) is 2.5% in CET1. Which statement is correct?

The bank satisfies the 5.5% minimum CET1 but falls short of the 8% needed with the 2.5% conservation buffer. It has therefore used part of the buffer, which triggers restrictions on dividends and other discretionary distributions until it rebuilds capital.

  1. AThe bank meets all requirements as CET1 exceeds 5.5%
  2. BThe bank is in breach of the minimum CET1 and must stop operations
  3. CThe bank meets the minimum CET1 but has dipped into the CCB, so it faces constraints on distributions such as dividendsCorrect
  4. DThe bank may pay full dividends because the CCB is optional

Explanation

CET1 requirement including CCB is 5.5% + 2.5% = 8%. At 7.5% the bank is above the 5.5% minimum but has eroded the buffer, so RBI-prescribed restrictions on distributing earnings apply. The buffer is not optional, so full dividends are not permitted.

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