Former RBI Governor Raghuram Rajan, who foresaw 2008 crisis, expects more bank troubles
Rajan said a decade of easy money and a flood of liquidity from central banks has caused an 'addiction' and a fragility within the financial system
- Apr 6, 2023,
- Updated Apr 6, 2023 7:17 PM IST
Former RBI Governor Raghuram Rajan said he expects more bank troubles after collapse of Silicon Valley Bank and Credit Suisse.
He said a decade of easy money and a flood of liquidity from central banks has caused an “addiction” and a fragility within the financial system as policy makers tighten policy.
“I hope for the best but expect that there might be more to come, partly because some of what we saw was unexpected,” Rajan said in an interview in Glasgow, reported Bloomberg. “The entire concern is that very easy money (and) high liquidity over a long period creates perverse incentives and perverse structures that become fragile when you reverse everything.”
Rajan, now a professor at University of Chicago Booth School of Business, said banks are vulnerable to unwinding after central banks “flooded the system with liquidity".
“This sense that the spillover effects of monetary policy are huge and aren’t dealt with by ordinary supervision has just escaped our consciousness over the last so many years,” Rajan said.
“It’s an addiction that you’ve forced into the system because you flood the system with low return liquid assets and banks are saying, ‘we’ve got to hold this, but what do we do with it? Let’s find ways to make money off it’ and that gives makes them vulnerable to the withdrawal of liquidity.”
Last month, Swiss authorities announced that UBS would buy Credit Suisse in a shotgun merger to stem further banking turmoil after the smaller lender had come to the brink of collapse.
After a run on deposits, the Swiss government had turned to UBS, which agreed to buy Credit Suisse for 3 billion Swiss francs ($3.3 billion), while the Alpine state put up more than 200 billion francs of support and guarantees.
Former RBI Governor Raghuram Rajan said he expects more bank troubles after collapse of Silicon Valley Bank and Credit Suisse.
He said a decade of easy money and a flood of liquidity from central banks has caused an “addiction” and a fragility within the financial system as policy makers tighten policy.
“I hope for the best but expect that there might be more to come, partly because some of what we saw was unexpected,” Rajan said in an interview in Glasgow, reported Bloomberg. “The entire concern is that very easy money (and) high liquidity over a long period creates perverse incentives and perverse structures that become fragile when you reverse everything.”
Rajan, now a professor at University of Chicago Booth School of Business, said banks are vulnerable to unwinding after central banks “flooded the system with liquidity".
“This sense that the spillover effects of monetary policy are huge and aren’t dealt with by ordinary supervision has just escaped our consciousness over the last so many years,” Rajan said.
“It’s an addiction that you’ve forced into the system because you flood the system with low return liquid assets and banks are saying, ‘we’ve got to hold this, but what do we do with it? Let’s find ways to make money off it’ and that gives makes them vulnerable to the withdrawal of liquidity.”
Last month, Swiss authorities announced that UBS would buy Credit Suisse in a shotgun merger to stem further banking turmoil after the smaller lender had come to the brink of collapse.
After a run on deposits, the Swiss government had turned to UBS, which agreed to buy Credit Suisse for 3 billion Swiss francs ($3.3 billion), while the Alpine state put up more than 200 billion francs of support and guarantees.