Question
Which of the following is/are correct regarding Capital
Conservation Buffer? I It is required when there is excess growth in bank’s credit portfolio II It is 2.5% of Risk Weighted Assets (RWA) III It is required to be maintained over and above the minimum regulatory capital IV It intends to ensure that banks are able to absorb losses even in economic distressSolution
Capital Conservation Buffer (CCB) is designed to absorb losses during periods of financial and economic stress. Financial institutions will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress, bringing the total common equity requirement to 7% (4.5% common equity requirement and the 2.5% capital conservation buffer). The capital conservation buffer must be met exclusively with common equity. Financial institutions that do not maintain the capital conservation buffer faces restrictions on payouts of dividends, share buybacks, and bonuses.
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