Which of the following statements is correct?
A) Unilateral collateral obligations to sovereign counterparties provide liquidity to banks.
B) Under Basel III commercial banks are most likely to incur lower costs to service their sovereign clients.
C) While banks usually do not call for collateral from sovereign counterparties, they must provide collateral for the offsetting hedge transactions which are undertaken with commercial counterparties.
D) Uncollateralised exposures to sovereign counterparties will not require additional regulatory capital to be set aside against potential credit losses

Question

Quizplus · Accepted Answer

The statement in option C is correct, as it correctly highlights that banks usually do not call for collateral from sovereign counterparties, but must provide collateral for offsetting hedge transactions with commercial counterparties. Option A is incorrect, as unilateral collateral obligations to sovereign counterparties may actually reduce the liquidity available to banks. Option B is incorrect, as under Basel III, commercial banks are required to incur higher costs to service their sovereign clients. Option D is incorrect, as uncollateralized exposures to sovereign counterparties can still result in potential credit losses for banks, and would require additional regulatory capital to be set aside.

Which of the Following Statements Is Correct