Former RBI Governor Raghuram Rajan Expresses Concerns Over US Banking Crisis and Government Bailouts

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In a recent podcast interview, Raghuram Rajan, former Governor of the Reserve Bank of India, shared his views on the banking crisis in the United States and the subsequent response of the US authorities. Speaking with Taimur Baig, Managing Director and Chief Economist at DBS Bank, Rajan expressed concerns over the increasing risks taken by banks in pursuit of profits, only to shift the burden onto the government during periods of financial distress.

Rajan acknowledged that the US authorities’ response to the medium-sized bank collapses in March was driven by the fear of a potential domino effect and panic in the financial system. He highlighted the surge in uninsured liabilities within the banking sector, partly attributed to the extensive quantitative easing measures implemented over the past few years. While the immediate problem was addressed through implicit deposit insurance, Rajan emphasized the need to reassess the long-term profitability of midsize banks. He suggested that mergers might be necessary in certain cases.

Baig raised the question of moral hazard associated with the implicit guarantee provided to banks. Rajan responded by stating that the lack of willingness among authorities to let entities fail had resulted in a culture of riskless capitalism, where banks could take risks with impunity, knowing that they would be rescued collectively. He cited the example of the rescue of Silicon Valley Bank, asserting that while it was portrayed as not being a bailout, it did involve changing the terms of the contract to benefit private sector actors.

Expressing his worry, Rajan criticized the pattern where entities generated profits during favorable times but shifted the burden of risk to the government during crises. He lamented the lack of accountability and the failure of government-related authorities to hold those responsible for taking risks accountable for their actions. Rajan stressed the importance of making individuals bear the consequences of their decisions, rather than socializing losses.

The concerns raised by Raghuram Rajan highlight the ongoing challenges within the global financial system and the need for a reevaluation of regulatory approaches. The headline for this news could be “Former RBI Governor Raghuram Rajan Expresses Concerns Over US Banking Crisis and Government Bailouts.”

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