Thursday, May 25, 2023

Raghuram Rajan: "We Should Be on the Alert for More Problems"

As noted in March 30's "Raghuram G. Rajan: 'The Fed’s Role in the Bank Failures'"
Professor Rajan is one of the few central bankers who seems to know what's what (except maybe for the RBI currency switcheroo of November 2016. That was a fustercluck)....

From Neue Z├╝rcher Zeitung's, May 15:

Raghuram Rajan, Professor of Finance at the University of Chicago and former Governor of the Reserve Bank of India, fears that the crisis in the US banking sector is not over. He explains why he thinks the stress in the financial system is an unintended consequence of easy monetary policy, and why a soft landing seems unlikely.

Deutsche Version

In the United States, one bank after another is collapsing. After the failures of Silicon Valley Bank and Signature Bank in March, another bank, First Republic Bank, had to be rescued through an emergency takeover at the beginning of May. PacWest is feared to be next. Even the shares of larger banks such as US Bancorp and Capital One are under heavy pressure.
Although things otherwise remain remarkably quiet in the financial markets, Raghuram Rajan sees no reason to sound the all-clear. «Unfortunately, the sense is that this particular phase of the banking problems is over, but I think the banking system still needs watching», says the finance professor at the University of Chicago and former Governor of the Reserve Bank of India.

Dr. Rajan knows what he is talking about. In the summer of 2005, he caused a stir when he warned against excesses in the banking system in front of the assembled financial elite at the economic symposium in Jackson Hole. He was sharply criticized back then, but today he is one of the most renowned economists of our time.

In an in-depth conversation with The Market NZZ, which has been lightly edited for length, he explains why the banking crisis is likely to continue, where the main vulnerabilities in the financial system are and why, in his view, they are a consequence of the easy money with which the Federal Reserve has repeatedly flooded the system in the past years. He also says why the risk of a hard landing for the economy is high.

«At some point, we need to pay more attention to easy monetary policy, creating the kind of financial vulnerabilities that lead to the problems we’re seeing today»: Raghuram Rajan.

Professor Rajan, the regional banking crisis in the US is dragging on. With First Republic Bank, another institution recently collapsed. How do you assess the situation?

As it was the case with Silicon Valley Bank and Signature Bank, First Republic Bank was in a very difficult situation. This was a bank in the category of the «walking wounded», it was inevitable that something would happen eventually. Unfortunately, the sense is that this particular phase of the banking problems is over, but I think the banking system still needs watching.


The recent events highlighted mid-sized banks with volatile deposits and asset problems. I think the asset problems haven’t gone away. There are still lots of losses to be absorbed on bank balance sheets, and the problem with volatile deposits hasn’t gone away either. There certainly are deposits that are looking at higher interest rates and demanding higher interest rates to stay. That means net interest margins for many banks are shrinking considerably. As a result, there will be an issue of longer-term health of the banking system, especially regarding mid-sized banks exposed to areas like commercial real estate....


Some of our posts on Professor (U.Chicago-Booth) Rajan:

February 11, 2022
Former Reserve Bank of India Head, Raghuram Rajan: "Central Banks Have to Start to Move"
«We sort of stopped thinking about countries like Italy. But if we come out of the pandemic and interest rates are not at 1% or 2%, but at 4% or 5%, what happens to public finances? Obviously, the biggest risks are always the ones you don’t see. But this is a risk we haven’t paid attention to for a long time»:
—Raghuram Rajan.

Long time readers may remember Professor Rajan from such hits as: 

Raghuram Rajan on The Boom and Bust in Farm Land Prices in the United States in the 1920s
India’s Central Bank Governor Discusses Robber-Baron Capitalism and a Fine Veg Cutlet 

Okay, I'm being a bit whimsical, the man is brilliant and I wish he was running the U.S. Fed rather than sitting in his comfy endowed chair at the Booth School of Business.