Key Points
Raghuram Rajan, former governor at the Reserve Bank of India, is worried about a big simmering time bomb, long-term problems, the domino impact and riskless capitalism with regard to banks in the world's largest economy that saw three lenders failing since March...
In a podcast hosted by DBS Bank's Chief Economist Taimur Baig, Rajan said the US authorities' response to the bank failures was somewhat predictable, in the sense that they certainly are very worried about a cascade of failures and they're worried about panic...
This is after rates on safe assets went up, while banks are trying to pass off a half percent or 1% increase.. There has been a significant increase in uninsured sort of liabilities in the banking sector over the last couple of years, partly as a result of the enormous quantitative easing that has taken place, Rajan said.. Rapidly policy rate increase spelled trouble for some businesses to pay back or service loans, trigerring risks of losses for lenders who were already reeling under recession fears...
Rajan said the broader problem is that entities make money in normal times taking risks, and then throw the risk back to the government in bad times.. "And then the government, the government related authorities have not shown any willingness to tell people you took the risk, you must bear it, yes, equity holders got wiped out..
But the uninsured depositors got a free pass," he said.. Rajan also agreed to concerns that banks will be the first domino and there are brokerage houses and asset managers, perhaps even private equity, where the duration mismatch and mark to market losses could be potentially destabilizing...
