When Raghuram Rajan flagged risks in the financial system and warned of a crisis as IMF's chief economist in 2005, he was labelled a luddite who opposes new methods. Three years later in 2008, the collapse of Lehman Brothers was followed by one of history's worst financial crashes that dragged down the global economy.
Now the former Reserve Bank of India Governor has predicted that things will turn gloomier for the banking sector, after the Silicon Valley Bank crash and Credit Suisse rescue.
Too much liquidity harming banks
Pointing at a decade of easy money which has injected too much liquidity into central banks, Rajan warned that it is fuelling fragility in the entire sector.
According to him, a quick reversal of the ultra-accomodative policies deployed in the aftermath of the last financial crisis, has given a free run to banks.
Simply put banks have a lot of liquidity, and want to make more money off it, which lands them in risky positions.
Banks left fragile against headwinds?
The Silicon Valley Bank and Signature Bank collapsed due to their heavy exposure to long term bonds, which caused losses when interest rates went up.
As depositors rushed to withdraw their funds from lenders, the banks crumbled under pressure, triggering off a crisis.
Weeks after that the Credit Suisse bank, battling scandals and losses for years, also gave in and had to be rescued by UBS.
But as per Rajan, this is just the tip of the iceberg, and a turmoil is yet to hit the global banking sector, although he hopes for the best.
He also added that everyone is ignoring the fact that the spillover caused by the tightening of the monetary policy can't be tackled with ordinary supervision.
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