Glossary of Central Banking Terms for CAIIB 2026: Capital, Basel & Risk

If you are preparing for the CAIIB Central Banking elective. Mastering the core central banking terms is the single fastest way to add easy marks to your scorecard. Examiners love definitions. They reward candidates who can explain capital. Basel norms and risk in clean, confident language.

This guide is your 2026-ready glossary. It refreshes every key term from the syllabus. Explains it in plain English.

And shows you exactly how to remember it on exam day. No jargon overload. Just the concepts that actually appear in the paper.

Why Central Banking Terms Matter for CAIIB

The CAIIB Central Banking paper is concept-heavy. A large share of questions test whether you truly understand the vocabulary of banking supervision. Capital adequacy.

Get the definitions right and you build a strong foundation. Many numerical and case-based questions are simply definitions in disguise. If you know what a term means. You can usually reason your way to the answer.

This blog refreshes the meanings of the most important central banking terminologies so your revision is fast. Focused and exam-oriented. Treat it as your quick-reference sheet in the final weeks.

Quick-Facts Table: Central Banking Glossary at a Glance

Before the detailed explanations, here is a snapshot of the headline terms. Use this table for last-minute revision the night before your exam.

Always confirm the latest ratios. Percentages. Effective dates on the most recent official IIBF notification. RBI master directions. Since these are revised from time to time.

Capital Funds and the Capital Adequacy Framework

Capital funds represent owners' equity in a bank. The basic idea of the capital adequacy framework is simple. A bank should hold enough capital to absorb any losses arising from the risks in its business.

Capital is not one single block. It is divided into different levels based on the quality of each qualified instrument. For supervisory purposes. Capital is grouped into two categories: Tier I and Tier II.

Tier I Capital (Core Capital)

Tier I capital is a key component of regulatory capital. It consists primarily of share capital and reported reserves. Minus goodwill if any.

Tier I items are treated as the highest quality. Why? Because they are fully available to cover losses at any time. For this reason, Tier I is also called core capital.

Tier II Capital (Supplementary Capital)

Tier II capital is another component of regulatory capital. Also known as supplementary or ancillary capital. It consists of certain reserves and certain types of subordinated debt.

Tier II items qualify as regulatory capital only to the extent they can absorb losses arising from the bank's operations. They are a second line of defence after Tier I.

Components That Feed Into Capital

Several smaller items make up or affect a bank's capital base. Knowing these one-liners is enough for the exam.

• Revaluation reserves: Part of Tier II capital. They arise when undervalued assets - typically bank premises. Marketable securities - are revalued. Their reliability as a buffer depends on how certain those market values are. Especially in stressed or forced-sale conditions.
• Capital reserves: The portion of a company's profits not paid out as dividends. Also called non-distributable reserves, they are plowed back into the business.
• Deferred tax asset (DTA): Arises from unabsorbed depreciation. Loss carry-forwards that can be set off against future taxable income. These timing differences are accounted for under Accounting Standard 22.
• Deferred tax liabilities (DTL): Have the effect of increasing income-tax payments in the next year. They are deferred income taxes and meet the definition of a liability.
• Subordinated debt: Debt that ranks lower in priority. In bankruptcy or liquidation. It is repaid only after other (senior) debt is settled.
• Hybrid debt-equity instruments: Instruments that combine features of both equity and debt. If they closely resemble equity - especially if they can absorb losses on a sustained basis without triggering liquidation - they may be included in Tier II capital.

Basel Norms: The Global Rulebook for Bank Capital

You cannot understand modern central banking terms without the Basel framework. These norms create a common. Risk-based language for bank capital across the world.

Basel Committee on Banking Supervision (BCBS)

The Basel Committee is a committee of banking supervisors made up of members from the G10 countries. It acts as a forum to discuss solutions to specific supervisory problems.

Importantly. It coordinates the sharing of supervisory responsibilities among national authorities for foreign banking institutions. The goal is effective supervision of banking activities worldwide.

The Basel Capital Accord

The Basel Capital Accord was an agreement among country representatives in 1988 to create standardised. Risk-based capital requirements for banks across countries.

It was later replaced by a new capital adequacy framework. Basel II, published in June 2004. Basel II rests on three mutually reinforcing pillars that help banks. Supervisors assess the various risks banks face.

For exact thresholds and the current status of Basel III in India. Always confirm on the latest official IIBF notification and RBI guidelines.

Risk-Weighted Assets and CRAR

This is one of the most frequently tested clusters of central banking terms. Understand the link between risk weights and the capital ratio. And you can answer most questions in this area.

Risk-Weighted Asset (RWA)

To find a risk-weighted asset. You multiply the face value of the asset by the risk weight assigned to it.

Risk weights differ by asset type. For example. A government security may carry a 0% risk weight. While exposure to a AAA-rated foreign bank may carry a 20% risk weight. Riskier assets attract higher weights, and therefore demand more capital.

CRAR (Capital to Risk-Weighted Assets Ratio)

CRAR is found by dividing a bank's capital by its aggregated risk-weighted assets for credit risk. Market risk and operational risk.

The rule is simple to remember. The higher a bank's CRAR, the better capitalised it is. A strong CRAR signals a strong safety cushion. For the current minimum CRAR applicable in India. Confirm on the latest official RBI notification.

The Three Pillars of Risk: Credit, Market and Operational

Basel II identifies three core risks. Each has its own approaches for calculating the capital requirement. This section is gold for direct questions.

Credit Risk

Credit risk is the risk that a party to a contract or transaction fails to meet its obligations. It can attach to almost any financial transaction.

Basel II offers two options for measuring the capital requirement for credit risk:

1. Standardised Approach (SA)
2. Internal Rating Based (IRB) Approach

Market Risk

Market risk is the risk of loss arising when market prices or rates move away from the rates or prices set in the original transaction or agreement.

Two methods are available to estimate the capital needed to cover market risk:

1. Standardised Measurement Method: Currently implemented by the Reserve Bank. It uses a "building block" approach for interest-rate and equity instruments. It separates capital for "specific risk" from capital for "general market risk".
2. Internal Models Approach (IMA): Lets banks use their own in-house models. These must meet the qualitative. Quantitative criteria set by the BCBS. Need the express approval of the supervisory authority.

Operational Risk

Operational risk is the risk of loss from failed internal processes. People, systems or external events. The revised Basel II framework offers three approaches to estimate the capital requirement.

1. Basic Indicator Approach (BIA): Sets the operational risk charge as a fixed percentage (the "alpha factor") of a single indicator that acts as a proxy for the bank's risk exposure.
2. Standardised Approach (SA): The bank divides its operations into eight standard business lines. The capital requirement for each is the gross income of that line multiplied by a coefficient (the "beta") assigned to it.
3. Advanced Measurement Approach (AMA): Regulatory capital equals the level of risk generated by the bank's own internal operational-risk measurement system.

In India. Banks were advised to adopt the BIA to estimate operational-risk capital. Under this approach. 15% of the average gross income of the last three years is taken to calculate the requirement. Always confirm the latest applicable percentage on the current RBI master direction.

Pillar 2 Terms: ICAAP and Supervisory Review

These two terms anchor the supervisory side of Basel II. Appear regularly in the CAIIB paper.

• Internal Capital Adequacy Assessment Process (ICAAP): Under the Basel II guidelines. Banks must have a board-approved ICAAP policy to assess their capital requirement at both individual. Consolidated levels. It is the bank's own honest assessment of how much capital it really needs.
• Supervisory Review Process (SRP): This process assumes that banks build appropriate risk-management systems. And that the supervisory authority then reviews and controls them. It is the supervisor checking the bank's homework.

How to Study Central Banking Terms (Practical Method)

Memorising definitions blindly does not work. Use a smarter, layered method to make these central banking terms stick.

1. Group by theme. Cluster terms into capital, Basel, risk and supervision. Your brain remembers families, not random lists.
2. Write one-line definitions. Force each term into a single sentence in your own words. If you can compress it, you understand it.
3. Use the comparison tables above. Contrast Tier I vs Tier II, and the three risk types. Differences are easier to recall than isolated facts.
4. Test with active recall. Cover the meanings column and try to define each term from memory. Then check.
5. Practise application. Solve mock tests so you see how terms appear as MCQs and small cases.
6. Revise in spaced cycles. Revisit this glossary after one day. One week and again before the exam.

Pair this glossary with our free guides on other CAIIB subjects to build a complete revision system.

Common Mistakes Candidates Make

Many CAIIB aspirants lose easy marks on definition questions. Avoid these traps.

• Confusing Tier I and Tier II. Remember: Tier I is core and highest quality; Tier II is supplementary.
• Mixing up the risk approaches. Credit risk uses SA and IRB. Market risk uses the Standardised Measurement Method and IMA. Operational risk uses BIA, SA and AMA. Do not interchange them.
• Memorising outdated figures. Ratios and percentages change. Learn the concept. Then verify the latest number on the official IIBF or RBI notification.
• Ignoring Pillar 2. ICAAP and SRP are easy marks that students often skip. Do not.
• Skipping practice. Reading alone is not enough. Test recall with mock tests.

Frequently Asked Questions

What is the difference between Tier I and Tier II capital?

Tier I is core capital - mainly share capital. Reserves -. Is the highest quality because it can fully absorb losses.

Tier II is supplementary capital. Made up of certain reserves and subordinated debt. And acts as a second line of defence.

What does CRAR mean in banking?

CRAR is the Capital to Risk-Weighted Assets Ratio. It is a bank's capital divided by its total risk-weighted assets for credit. Market and operational risk. A higher CRAR means the bank is better capitalised and safer.

What are the three pillars of Basel II?

Pillar 1 covers minimum capital requirements for credit, market and operational risk. Pillar 2 covers the supervisory review process, including ICAAP. Pillar 3 covers market discipline through disclosure.

What are the three types of risk under Basel norms?

The three core risks are credit risk (a borrower failing to pay). Market risk (loss from moving prices or rates). And operational risk (loss from failed processes, people, systems or external events).

How important are central banking terms for the CAIIB exam?

They are very important. Definitions are among the highest-scoring, lowest-effort questions in the Central Banking elective. Mastering them also helps you tackle application-based and case questions with confidence.

Final Thoughts: Turn Definitions Into Marks

The CAIIB Central Banking elective rewards clarity. Once these central banking terms become second nature. Definition questions turn into guaranteed marks. And tougher questions feel far less intimidating.

Revise this glossary often. Group the terms. Test your recall, and back it up with steady practice. Consistency beats cramming every single time.

You have the roadmap. Now put in the focused reps. Trust the process, and walk into the exam hall ready to score. Your CAIIB success is built one clear concept at a time.

Related Guides

For more on central banking terms. See the official IIBF circulars. Our chapter-wise free notes on iibf.store.

For more on “central banking terms”, explore our free mock tests and chapter notes on iibf.store.