Section I Verbal Ability and Reading Comprehension Directions (Q. Nos. 1-24)
Read the passages given below and choose the most suitable option from the given ones. Passage 1
The structure and operations of banks have undergone a rapid transformation in recent years. Consequent upon the revolution in information technology and the associated increase in competition financial intermediaries have become increasingly global in geographical coverage and universal in the financial operations, encompassing a wide range of activities including banking, securities markets activities and insurance. In the face of widespread concerns about declining profitability of banks, the Basel capital adequacy norms were enacted.
Although the Basel norms helped to arrest the erosion of banks, capital ratios, concerns were raised regarding the mere applicability o f baseline capital ratios in the changed environment of operation. The blurring of both functional as well as national divisions among the financial intermediaries and the speed and complexity of adjustment, made it difficult for regulators to keep up with the growing pace change. In particular, the rule o f‘one-size-fits-alf aspect of the capital adequacy ratio was the subject of intense debate. Recent banking crisis only emphasized the point that baseline capital, adequacy norms were not adequate to hedge against failures. In response to the same, the Basel Committee on Banks Supervision came out with the new Consultative Paper on Capital Adequacy. It invited suggestions from the policymakers, academia and other institutes all over the world. After taking into consideration manifold suggestions of the various organizations, the second Consultative Paper on Capital Adequacy was released.
The Accord rests on three pillars; the first pillar of minimum capital requirement, the second pillar of supervisory review process and the third pillar of market discipline. The first pillar sets out the minimum capital requirements. The new framework maintains both the current definition of capital and the minimum requirement of 8% of capital to risk-weighted assets. The revised Accord will be extended on a consolidation basis to holding companies of banking groups. The Accord stresses upon the improvement in measurement of risks. The credit risk measurement methods have been made more elaborate than those in the existing Accord. The new framework also emphasizes the measurement of operational risk. For measuring credit risk, two options have been proposed. The First is the standardized approach and the second is the internal rating based approach. Under the standardized approach, the existing approach for credit risk remains conceptually the same but the risk-weights have been enlarged to encompass exposures to a broad category of borrowers with reference to the rating provided by rating agencies.