Economics • Banking & FinanceHard
What is the primary function of the 'Countercyclical Capital Buffer (CCyB)' framework in banking regulation?
A. To require banks to accumulate capital during periods of high credit growth, which can be drawn down during economic downturns✓ Correct Answer
B. To restrict commercial banks from investing in foreign equity markets when domestic inflation exceeds tolerance limits
C. To compel banks to maintain foreign exchange reserves matching their short-term external commercial borrowings
D. To penalize banks that fail to meet priority sector lending targets by freezing their incremental branch expansion
💡 Solution & Explanation
The Countercyclical Capital Buffer requires banks to build up capital buffers during economic booms when credit growth is excessive, protecting the banking sector during downturns when losses materialize. Distractors confuse it with foreign investment restrictions, exchange reserve matching, or priority sector penalties. The Reserve Bank of India reviews the activation of this buffer periodically based on credit-to-GDP gap indicators. It aims to insulate the financial system from systemic risks associated with credit cycles.
More Economics Banking & Finance questions
- Which of the following bodies is responsible for the regulation and development of micro, small, and medium…
- Examine the Basel III capital adequacy guidelines implemented for commercial banks. What constitutes 'Tier 2…
- In the context of Indian banking, what does 'NEFT' stand for, and what is its operational settlement…
- What does the 'Internal Ombudsman Scheme' for regulated entities in India aim to achieve?
- What is the primary function of the Reserve Bank of India when it acts as the 'Banker to Banks'?