Capital Adequacy Ratio Banking Regulation
Question
Consider the following statements:
Which of the statements given above is/are correct?
- 1.
Capital Adequacy Ratio (CAR) is the amount that banks have to maintain in the form of their own funds to offset any loss that banks incur if account-holders fail to repay dues.
- 2.
CAR is decided by each individual bank.
Options
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Explanation
Statement 1 is correct: Capital Adequacy Ratio refers to the minimum capital that banks must maintain relative to their risk-weighted assets to absorb losses and protect depositors and creditors. It is indeed a buffer of own funds maintained by banks. Statement 2 is incorrect: CAR is not decided by individual banks. It is determined by the Reserve Bank of India (RBI) through regulatory guidelines, with standards set internationally through Basel Accords (Basel I, II, and III). Currently, banks in India must maintain a minimum CAR of around 10-11% of risk-weighted assets. Therefore, only statement 1 is correct. > CAR: RBI-mandated capital buffer, not bank-determined - essential for financial stability. Answer: a
Question details
Year
2018
Paper
GS Paper 1
Question
Q16
Subject
Economy
Sub-topic
Banking Regulations and Financial Standards
Type
Statement-based
Difficulty
Medium
Nature
Static
Source hint
NCERT Economics - Banking and Financial System
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