money supply, banking & financial institutions section 8 MCQ Questions & Answers Detailed Explanation

Answer: (c)

Answer: (c)

Answer: (c)

Cash Reserve Ratio is a regulation set by the Central bank (RBI in India) which dictates the minimum amount (reserves) that a commercial bank must be held to customer notes and deposits.

A decrease in CRR will make it mandatory for the banks to hold a lesser proportion of their deposits in the form of deposits with the RBI. This will increase the number of Bank deposits and they will lend more as they have more amount as their reserve.

Answer: (c)

Answer: (d)

Some banks, due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, become systemically important. The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity.

Therefore, the continued functioning of Systemically Important Banks (SIBs) is critical for the uninterrupted availability of essential banking services to the real economy.

All the banks under D-SIB are subject to additional capital requirements. Banks whose assets exceed 2% of GDP are considered part of this group.

SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets.

However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future. These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them.

The concept of D-SIB emerged after the global financial crisis of 2008. As per the framework, from 2015, every August, RBI has to disclose names of banks designated as D-SIB.

Answer: (b)