Mumbai- Reserve Bank Governor Shaktikanta Das on Friday cautioned banks against any excessive mismatches in their asset-liabilities front, saying both are detrimental to financial stability, which is evident from the ongoing crisis in the US banking sector where two mid-sized banks went belly up last week.

The ongoing crisis in the US banking sector drives home the importance of ensuring prudent asset liability management, robust risk management and sustainable growth in liabilities and assets; undertaking periodic stress tests; and building up capital buffers for any unanticipated future stress, Das said.

He was delivering the 17th KP Hormis (Federal Bank founder) commemorative lecture in Kochi this evening.

It can be noted that two mid-sized American banks (the startup sector-focused Silicon Valley Bank in California and a similar one in New York, the First Republic Bank) with over USD 200 billion in balance sheets each went belly up.

Das, without naming any of these US banks, said on the face of it, one of them had unmanageable deposits in excess of their assets side business.

That bank invested the excess deposit money into government securities the value of them went down when the interest went up exorbitantly in the US as the Federal Reserve set out to contain inflation — at a four-decade high — and this forced the bank to sell the government securities at a heavy loss, leading to crisis, which forced its depositors to withdraw money, leading to a run on the bank and the eventual bankruptcy.

The bank should have expected that interest rates will go up when inflation hit the roof, and the US Fed began to increase rates. This should have forced them to diversify their assets and also lower their deposits, he said.

The ongoing banking crisis in the US also speaks volumes that cryptocurrencies/ assets or the like can be a real danger to banks, whether directly or indirectly, said Das, who has been calling for a complete ban on such private digital money.

The Reserve Bank has taken the necessary steps in all these areas. The regulation and supervision of the financial sector and regulated entities have been suitably strengthened.

Reeling out the many regulatory and supervisory measures the central bank has taken in recent years, especially since the onset of the pandemic, Das said those steps include the implementation of leverage ratio (in June 2019), large exposures framework (in June 2019), guidelines on governance in commercial banks (in April 2021), guidelines on the securitisation of standard assets (in September 2021), the scale-based regulatory framework for NBFCs (in October 2021), revised regulatory framework for microfinance (in April 2022), revised regulatory framework (in July 2022) for urban cooperative banks and guidelines on digital lending issued in September 2022.

Simultaneously, he said, the RBI’s supervisory systems have been strengthened significantly in recent years through measures, which include a unified and harmonised supervisory approach for commercial banks, NBFCs and UCBs.

The frequency and intensity of on-site supervisory engagement are now based on the size as well as riskiness of the institutions. Off-site supervision has also become more intense and frequent, he said.

We’ve strengthened our engagement with the senior management and boards of banks. The focus is more on identifying the root cause of vulnerabilities, rather than dealing with the symptoms alone. We’ve also issued revised guidelines on oversight and assurance functions of financial entities using advanced data analytics to supplement our supervisory process, Das noted.  (PTI)


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