DBFI402 BASEL REGULATIONS AND RISK MANAGEMENT IN BANKING JULY-AUG 2025

Description

SESSION	JUL-AUG 2025
PROGRAM	MASTER OF BUSINESS ADMINISTRATION (MBA)
SEMESTER	04
COURSE CODE & NAME	DBFI402 BASEL REGULATIONS AND RISK MANAGEMENT IN BANKING

 

 

Assignment Set – 1

 

 

Q1. Elaborate on major features of Risk. 10         

Ans 1.

Major Features of Risk

Risk refers to the possibility of an adverse outcome arising from uncertainty in future events. In banking, risk affects profitability, liquidity, solvency, and long-term stability. Understanding the major features of risk helps banks design strategic mitigation frameworks and comply with Basel regulations.

1. Uncertainty and Variability

The primary feature of risk is uncertainty. Future outcomes cannot be predicted with complete accuracy, and unexpected changes in markets, interest rates, credit behaviour, or

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Q2. “Fund Transfer Pricing function is a Bank within a Bank.” Explain giving an example. 6+4     

Ans 2.

Fund Transfer Pricing Function is a Bank within a Bank

Fund Transfer Pricing (FTP) is an essential internal financial mechanism that helps banks allocate the cost and benefits of funds among various business units in a structured manner. It acts as a bridge between departments that mobilise funds and those that use these funds for lending or investment. The reason FTP is described as a “Bank within a Bank” is because it replicates the functioning of an internal marketplace, where funds are bought and sold

 

 

Q3. Discuss important components of the Supervisory Review Proces and coverage of Internal Capital Adequacy Assessment Process. 5+5

Ans 3.

Components of the Supervisory Review Process (SRP) & Coverage of ICAAP

The Supervisory Review Process (SRP), under Basel II Pillar 2, ensures banks maintain adequate capital beyond minimum regulatory requirements. It encourages banks to assess internal risks, capital adequacy, and long-term resilience. SRP is complemented by ICAAP (Internal Capital Adequacy Assessment Process), which focuses on internal evaluation of

 

 

Assignment Set – 2

 

 

Q4. Difference between value at risk and stress testing. 10

Ans 4.

Difference between Value at Risk and Stress Testing

Value at Risk (VaR) and stress testing are two fundamental risk-measurement techniques used in financial institutions to understand potential losses and strengthen decision-making. Both approaches aim to assess how risky a portfolio or institution may be under different market conditions, but they differ significantly in their methodology, purpose, assumptions, and interpretation. While VaR focuses on estimating potential losses under normal or

 

 

Q5. People Bank has the following Balance Sheet as on 31-03-2025 (Figures in crores of ₹ ):

Equity	1000	Cash	150
Disclosed reserve	1500	Government Bonds	1450
Subordinated Debts	700	Interbank Loan	1000
Deposits	24500	Mortgage loan	18000
Loan Loss Reserves	300	Loans to corporates	7400
TOTAL	28000		28000

 

Risk weights assigned are:

Cash	0%
Government Bonds	0%
Interbank Loan	20%
Mortgage loan	25%
Loans to corporates	50%

 

From the above information calculate following:

1.Tier-1 Capital

2.Tier II Capital

3.Total Capital

4.Risk Weighted Assets

5.CRAR

Ans 5.

Given Balance Sheet (₹ in crores)

Capital & Liabilities

• Equity: 1000
• Disclosed Reserves: 1500
• Subordinated Debts: 700
• Deposits: 24500
• Loan Loss Reserves: 300

 

 

Q6. List out failures of Basel II exposed during the Sub Prime Crisis.

Ans 6.

Failures of Basel II Exposed During the Subprime Crisis

The global financial crisis of 2007–08, also known as the Subprime Crisis, highlighted several structural weaknesses and regulatory gaps in the Basel II framework. Although Basel II was designed to make banks more risk-sensitive and sophisticated in managing exposures, the crisis exposed major limitations in its design, implementation, and underlying assumptions. These failures demonstrated that the framework was unable to anticipate systemic shocks, prevent excessive risk-taking, or control market instability.

One of the most significant failures of Basel II was its heavy reliance on credit rating