RBI issues norms on capital requirements for market risk under Basel III for banks
GS3Economy · S&T · Environment · Security· Monetary policy, RBI & banking· Prelims·
Banking regulation and capital adequacy: a key GS3 topic regarding financial stability.
Why in news
The RBI issued directions to align market risk guidelines with Basel III standards for commercial banks to ensure robust capital adequacy.
Background
The RBI's new norms apply to all commercial banks except small finance, payments, and local area banks. The guidelines mandate the use of Standardised Approach (SSA) for computing risk-weighted assets (RWAs) multiplied by a factor of 12.5.
Facts for Prelims
- BodyRBI: The regulatory body issuing the Basel III alignment directions.
- FactThe new market risk guidelines will be applicable from April 1, 2027.
- FactBanks are prohibited from reclassifying instruments to avoid regulatory arbitrage.
- FactThe SSA method must be used for computing RWAs multiplied by a factor of 12.5.
Prelims practice question
Which factor is used to multiply the risk-weighted assets (RWAs) when using the Standardised Approach (SSA) under the new norms?
- (a)8.5
- (b)12.5
- (c)20.0
- (d)15.0
Show answer
Answer: (b) 12.5 — The guidelines mandate the use of the Standardised Approach (SSA) for computing RWAs multiplied by a factor of 12.5.
For Mains
Q. Discuss how the alignment of domestic banking norms with Basel III standards enhances the stability of the Indian financial system against market risks.
Dimensions to cover in your answer
- Regulatory arbitrage: Preventing banks from manipulating asset classification to lower capital requirements
- Systemic stability: Strengthening the capital buffer against market volatility through standardized risk-weighting
- Inclusion trade-off: Exempting small finance and local area banks to maintain credit flow to underserved sectors
Keywords: Capital Adequacy · Basel III · Risk-Weighted Assets · Regulatory Arbitrage · Monetary Stability
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This note is generated automatically from SatyaDheesh's news feed and mapped to the UPSC CSE syllabus. Check facts against the original report or PIB before using them in an answer.