CAIIB Paper 2 Module D Quiz 10

Short-term funding may initially be cheaper, but it exposes the bank to repricing, rollover and liquidity stress. Sustainable ALM evaluates risk-adjusted profitability, not margin alone.

CET1 ratio = CET1 capital ÷ RWA × 100 = ₹70 crore ÷ ₹700 crore × 100 = 10%. The applicable minimum plus buffers depends on the current regulatory framework.

Eligible Tier 2 instruments contribute to total regulatory capital and generally have gone-concern loss-absorption characteristics. They do not replace minimum CET1 or Tier 1 requirements.

Loan growth can increase RWA and reduce capital ratios unless capital grows correspondingly. Planning should consider risk weights, retained earnings, issuance, portfolio mix and stress outcomes.

Regulatory inflow caps prevent a bank from assuming that all expected inflows will arrive in stress and preserve the need for a genuine HQLA buffer. The detailed cap and treatment must follow current rules.

Longer-term funding typically has a more stable maturity profile than overnight wholesale borrowing, though NSFR assigns factors according to liability type and counterparty. Reliability and concentration also matter.

Under the general 90-day norm, an ordinary term loan with principal or interest overdue for more than 90 days is classified as NPA. Subsequent subcategory and provisioning depend on the duration and applicable rules.

An additional provision is an expense, so pre-tax profit falls by ₹5 crore, all else equal. Provisions also affect net asset values and regulatory reporting as applicable.

Restricting unrealised interest recognition avoids overstating income and profit on impaired assets. The bank recognises income in accordance with the applicable realisation-based rules.

Bond prices and yields generally move inversely. A higher discount rate lowers the present value of fixed future cash flows, so the price falls, with sensitivity influenced by duration and convexity.

Gap = ₹1,000 crore − ₹800 crore = ₹200 crore. Rate change = 0.004. Approximate NII change = ₹200 crore × 0.004 = ₹0.8 crore positive, assuming full repricing and no other effects.

A large depositor can create a significant cash need if funds are withdrawn. Management should monitor concentration, depositor behaviour, maturity, contingency options and stress assumptions.

Stress testing identifies vulnerabilities and supports preventive actions such as additional buffers, funding diversification, limits or contingency measures. It is a decision tool, not an exact forecast.

Capital is a loss-absorbing resource measured under regulatory rules, while provisions recognise credit losses or impairment. Their accounting and regulatory treatment differ, although both influence resilience.

NII and EVE capture different dimensions and horizons. Repricing may improve near-term earnings while the present value of longer-term cash flows declines, so both should be evaluated.

Higher expected loss reduces risk-adjusted earnings, and greater capital use increases the denominator. Unless compensated by other factors, the higher-risk loan will have lower RAROC.

FTP should reflect relevant funding and liquidity characteristics, including tenor and repricing. This gives product managers a more accurate view of margin and discourages unrecognised maturity transformation.

Limits implement the bank’s approved risk appetite. Any exception should follow formal authority and escalation procedures; speculative conviction does not itself authorise a breach.

Regulatory rates and implementation details can change. Candidates should verify the latest RBI instructions and effective dates, while using the syllabus and current official materials as the authoritative basis.

Integrated balance-sheet management considers the interaction among earnings, funding, liquidity, capital, asset quality and market sensitivity. Optimising one measure in isolation can create hidden vulnerabilities elsewhere.