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US Bank collapse proves importance of ensuring prudent asset liability management: Das

Reserve Bank of India (RBI) Governor Shaktikanta Das.  file

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

Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday said that the development in the US banking sector highlights the importance of ensuring prudent asset liability management and strong risk management in the sector to maintain financial stability in the economy.

“Recent developments in the United States banking system have brought to the fore the importance of regulation and supervision of the banking sector. These are areas that have a significant impact on maintaining the financial stability of every country,” Mr. Das told the Federal Reserve. Delivering the KP Hormis Memorial Lecture, organized by the bank, he said. “More specifically, these developments in the US, especially in the last one week and thereafter, are aimed at ensuring prudent asset liability management, strong risk management and sustainable growth in liability and assets.” , prompting the importance of conducting periodic stress tests and creating critical buffers. For any unforeseen future stressors,” he observed.

Mr Das said the development also highlighted the real danger that cryptocurrencies or similar assets could pose to banks, either directly or indirectly. “We have been engaging with our banks for the last several years. The Indian banking system remains resilient and stable,” he asserted.

RBI had taken necessary steps in risk management by conducting stress tests and focusing on asset management issues. “When we see excessive growth in deposits or excessive growth in credit or especially growth in credit without excessive growth in deposits, there is cause for concern. The bank has to decide where it wants to deploy its resources. where he wants to invest the money, if he has liquidity and resources, which are much more than his credit outflow. There comes the question of risk management. Every credit, investment where given, it is backed by proper risk assessment. should be supported,” Mr Das said.

Stating that he was not aware of all the facts of the case relating to the collapse of the bank in the US, Mr Das pointed to the Silicon Valley Bank (SVB) when he said: “What I want to say is one in particular Bank deposit rates were exorbitant. But credit did not increase accordingly and the excess money was invested in certain bonds, both government as well as private sector bonds”. Emphasizing that in such a situation “proper risk assessment is necessary was”, he added, adding that “these investments were made when interest rates were low”.

“When you are putting money in some bonds at very low interest rates, it is expected that banks should do proper risk assessment. It would be wrong to expect that interest rates will remain low forever. It was low for a long time. But you cannot assume that interest rates will remain low all the time. Interest rates will increase. Naturally when inflation rises, rates will be increased by the central bank. Therefore, interest risks and potential stress arising out of interest risks need to be properly assessed and appropriate stress tests need to be carried out. robust risk testing, risk management; To undertake very careful and sound asset liability management and look after all related issues. We have taken necessary steps in all these areas.

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