Q.7. Define Basel II Capital Accord?

Answer:
A set of banking regulations put forth by the Basel Committee on Bank Supervisio
n, which regulates finance and banking internationally.
Basel II attempts to integrate Basel capital adequacy standards with national re
gulations, by setting the minimum capital adequacy requirements of financial ins
titutions with the goal of ensuring institution liquidity
Basel II had three main ideas or
f the financial system:

pillars

to help ensure the safety and soundness o

1) Minimum Capital Requirements - Update regulatory capital requirements for cre

dit, market and operational risk. Credit risk could be measured through the bank s
own internal rating and credit scoring models
2) Supervisory Review Process - Emphasized separate regulatory evaluation proces
s in addition to capital requirements and stressed the importance of a bank s inte
rnal control procedures
3) Enhanced Disclosure (Discipline of Market) - Promote disclosure of the instit
ution s capital structure, risk exposure, and capital adequacy

Q.8. Banks invest in financial securities that they hold in their securities por
tfolio. A proportion of these securities may be government securities. Governmen
t securities are regarded as essentially risk-free and therefore pay a low rate
of return. Why then do banks invest in this type of security?
Answer:
Primary source of liquidity

government securities easily converted into cash

Invest short-term surplus funds securities provide a return, cash does not
Augment investment earnings another source of income
Use as collateral for future borrowings security to support bank s own borrowings
Improve the quality of the overall balance sheet lower risk government securities
offset higher risk loans to customers