Former Governor of Reserve Bank of India and former IMF chief economist, Raghuram Rajan, has warned of more trouble in the banking system after the rescues of Silicon Valley Bank and Credit Suisse. Rajan attributes the potential turmoil to a decade of easy money and a flood of liquidity from central banks, which has caused an “addiction” and a fragility within the financial system. He adds 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’s comments are in line with other warnings that the troubles at Silicon Valley Bank and Credit Suisse indicate deeper underlying problems in the financial system.
Raghuram Rajan, the former Governor of Reserve Bank of India, warns that the banking system is vulnerable to more turmoil as banks have become addicted to low return liquid assets, caused by the easy money and flood of liquidity from central banks. The banks are compelled to hold these assets and find ways to make money off them, which makes them vulnerable to the withdrawal of liquidity. Rajan’s comments add to warnings that the troubles at Silicon Valley Bank and Credit Suisse are indicative of deeper underlying problems in the financial system. According to Mr. Rajan, the central bankers have had it easy for the last decade as policymakers took an ultra-accommodative stance in response to the financial crisis. However, as the policy tightens to counter inflation, the vulnerabilities in the financial system have become more apparent. Mr. Rajan has warned that this may lead to more turmoil in the banking system as it has become fragile due to perverse incentives and structures created by the easy money and high liquidity over an extended period.
