Economics • Banking & FinanceHard
What does the 'Basel III' capital adequacy framework introduce regarding the 'Capital Conservation Buffer' (CCB) for commercial banks?
A. A mandatory capital reserve held exclusively in foreign currencies to cushion against exchange rate volatility
B. A buffer of high-quality capital built during normal times that can be drawn down during financial stress to absorb losses✓ Correct Answer
C. An emergency credit line provided by the central government to liquidate toxic non-performing assets
D. A restriction on dividend payments whenever bank credit growth exceeds deposit growth
💡 Solution & Explanation
Under Basel III norms, the Capital Conservation Buffer requires banks to maintain an additional layer of common equity tier 1 capital above regulatory minimum requirements during normal economic periods, which can be absorbed during stress situations to prevent breaching minimum capital thresholds. Alternative options incorrectly describe foreign exchange reserves or government bailouts. This buffer strengthens the loss-absorption capacity of individual banking institutions.
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