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8 views

SM6131-E2021

Uploaded by

Paritosh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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NATIONAL INSTITUTE OF TECHNOLOGY ROURKELA

End- TERM EXAMINATION, 2021


SESSION: 2021 – 2020 (Autumn)
MBA 3rd Semester

Subject code: SM-6131 Subject Name: Commercial Banking Dept. Code: SM


No. of pages: 2 Full Marks: 50 Duration: 2 Hours
Particulars
Write short notes (Minimum 500 words):
1. a) What were the central bank measures to mitigate the Covid impact on the
economy?
b) Does the loan moratorium impact the balance sheet of a bank?
or
2. Distinguish between: (Minimum 5 differences)
a) POS machines vs. ATMs
b) NEFT vs. RTGS

What are the block chain technologies in the banking? Explain the prime concerns of
3.
digitalization corporate banking system? [10]

4. What are the BASEL III norms? How can capital adequacy ratios impact the asset quality
of banks [10]
5. Explain in detail the time buckets of asset liability management (ALM)? What are the
different risks involved? [10]
6.
How can NBFCs fill the gap of traditional commercial banks? What are the challenges
faced to make NBFCs sustainable. [10]
7.
Case study- compulsory
Entering the global financial crisis, CET1 ratios were 6 to 8 percent in Europe, the United Kingdom, and
the United States. In that light, the projected landing points under scenarios A1 and A3 of 8.5 to 10.0
percent in the European Union, 11 to 13 percent in the United Kingdom, and 8.0 to 10.5 percent in the
United States demonstrate the resilience that the global banking system has built (Exhibit 3). But they may
also mark the end of a ten-year journey in a cushion zone, in which banks have held a comfortable level of
capital. In scenario A1, more than $400 billion in capital accumulated by European and US banks over the
past ten years would be wiped out.

As the pandemic continues, the banking system may enter what we call a caution zone, with a CET1 ratio
of about 8 to 10 percent, in which banks must start to rebuild their cushions and take other steps as well
(Exhibit 4). And, while the overall banking system seems sufficiently resilient, individual banks and possibly
entire regional systems could enter a danger zone, reached at a CET1 ratio of about 5.5 percent. In the
caution zone, banks will first need to understand exactly where they stand, through monthly or even weekly
stress tests. Many will find that they need to improve their health, starting with rebuilding at least part of
their capital buffer. Not only does the buffer provide resilience, as the COVID-19 crisis is proving, but
markets have become increasingly aware of the importance of a capital cushion to withstanding external
shocks. Capital formation won’t be easy, of course, with falling revenues and profits.

Our research shows that capital formation from retained earnings will drop from a level equivalent to 0.5 to
one percentage point of CET1 yearly to only 0.2 to 0.5 percentage point, thus making organic
recapitalization much slower. Raising private capital will also be difficult. Banks should therefore consider
taking a series of actions, some tactical and others structural.

Given the scarcity of available capital, banks will most likely need to reduce their dividend payouts and
stock buybacks and introduce compensation caps. They also will likely need to tighten their credit policies.
Depending on target CET1 ratios and dividend policies, banks could have capital to support between $1
trillion and $5 trillion of additional loans, according to a study by the Bank for International Settlements. 5
That may not be enough to meet their local economies’ needs and could generate a new credit crunch.

Banks might reduce exposure to noncore activities that absorb considerable capital—for example, by
exiting some businesses such as investment banking, limiting international expansion, or reducing exposure
to sovereign debt. While most banks have already run substantial cost-cutting programs, some may look to
achieve further cost efficiencies by, for example, shutting brick-and-mortar branches and migrating
ustomers to other service channels. Banks must take care, however, not to jeopardize long-term
relationships with their customers.

With differences in banks’ health and capital positions becoming starker, M&A will likely increase,
depending on regulatory approval. Tie-ups within the United States and especially within the European
Union will become attractive, accelerating the consolidation of the industry. Some cross-border mergers
might make sense (as will divestitures for some banks in the danger and caution zones).

A would-be acquirer should build a business case on its ability to supply credit to the weaker bank’s
customers, thus preserving productive output in the real economy. M&A will also involve cutting costs, an
important second-order effect that must be communicated to regulators. The merged bank might not be as
large as the original pair, but it will be more economically powerful.

Q What if a banking system moves from cushion to caution? Will banks enter the
danger zone?

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