U.S. bank fallout proves importance of ensuring prudent asset liability management: Das

Reserve Bank of India (RBI) Governor Shaktikanta Das. File
| Photo Credit: Reuters

Reserve Bank of India (RBI) governor Shaktikanta Das said on Friday that developments in the U.S. banking sector highlight the importance of ensuring prudent asset liability management and robust risk management in the sector in order to preserve financial stability in the economy.

“The recent developments in the United States’ banking system have brought to the fore the criticality of banking sector regulation and supervision. These are areas which have significant impact on preserving financial stability of every country,” Mr. Das said, delivering the K.P Hormis commemorative lecture organised by the Federal Bank. “More specifically, these developments in the US, especially over the last one week and thereafter, drive home the importance of ensuring prudent asset liability management, robust risk management and sustainable growth in liability and assets, undertaking periodic stress tests and building up critical buffers for any unanticipated future stress,” he observed.

Mr. Das added that the developments also flagged the real danger that cryptocurrencies or similar assets could pose to banks, whether directly or indirectly. “We have been engaging with our banks over the last several years. Indian banking system continues to be resilient and stable,” he stressed.

The RBI had taken necessary steps in risk management by doing stress tests and focussing on asset management issues. “When we see an excessive growth in deposits or an excessive growth in credit or in particular an excessive growth of deposits without corresponding increase in credit, then there is a cause of worry. The bank has to take the call on where it wants to deploy its resources, where it wants to invest the money, if it has got the liquidity and resources with it, which are far in excess of its credit outflow. There the question of risk management comes in. Every credit, investment where it is given out, it should be backed by appropriate risk assessment,” Mr. Das said.

Stating that he did not have insight into all the facts of the case related to the bank fallout in the U.S., Mr. Das alluded to the Silicon Valley Bank (SVB) when he said: “All that I want to say is that particularly one bank the deposit rate was excessive. But the credit did not grow correspondingly and the excess money was invested in certain bonds, both government and as well as private sector bonds”. Emphasising that in such a situation it was “necessary to do a proper risk assessment”, he added that “these investments were made when the interest rates were low”.

“When you are putting money in certain bonds at very low interest rates, it is expected that the banks should do proper risk assessment. It would be wrong to expect that interest rates remain low forever. It was low for long. But you cannot assume that the interest rates would remain low for all times. The interest rates will go up. Naturally when the inflation goes up, there will be rate hike by the central bank. So therefore, the interest risks and likely stress arising out of the interest risks need to be properly assessed and appropriate stress tests need to be done. RBI has been driving home this point to all banks to do internal stress tests, to ensure robust risk tests, risk management; to do very careful and robust asset liability management and look at all related issues. We have taken necessary steps in all these areas,” he emphasised.

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