Raghuram Rajan makes ominous prediction for global banking system

Raghuram Rajan makes ominous prediction for global banking system

According to Bloomberg, Raghuram Rajan, who formerly served as the International Monetary Fund Chief, has reportedly warned of further turmoil in the global banking system. Last month, Silicon Valley Bank and Credit Suisse collapsed but were eventually rescued. Rajan had predicted the global financial catastrophe more than a decade ago.

The former RBI governor said that an influx of easy money and liquidity from the central banks across the globe for over a decade catapulted the banking crisis and has led to an “addiction” while weakening the system.
In an interview with Glasgow, Rajan said, “I hope for the best but expect that there might be more to come, perhaps because some of what we saw was unexpected. 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.”

His observations highlight that the SVB and Credit Suisse collapses are indicative of fundamental issues in the global financial system. During his stint as the RBI governor from 2013 to 2016, Rajan received praise for adeptly steering the Indian economy.

As the IMF’s head economist, Rajan warned in 2005 that the banking sector was heading toward trouble.
Rajan remarked that bankers were given a “free ride,” pointing towards the lax stance adopted by the policymakers who are now scampering to mitigate the contemporary crisis.

“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 many years,” Rajan stated.

He opined that banks are in a precarious position after central banks “flooded the system with liquidity.”

“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 makes them vulnerable to the withdrawal of liquidity,” said Rajan, who’s currently a professor at the University of Chicago Booth School of Business.

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