The global financial system could seem stable, but RBI Governor Sanjay Malhotra said a number of new vulnerabilities could strain that stability. In a speech at the fifth Kautilya Economic Conclave in New Delhi on October 3, the governor said these include five systemic risks such as high global debt, asset price valuation excesses, high leverage, private credit risks, and cyber risks amplified by AI.
Global debt raises pressure on economies
The very first problem cited by the RBI Governor was the rise in global debt. Higher debt levels, shorter maturities, and increased bond yields can raise the borrowing costs for the Government of India and corporates. With costly borrowing, government finances are likely to be squeezed, and debt management becomes more complex. Companies might also face increasing financing pressure, and Malhotra said this could be especially likely if multiple risks come to pass.
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AI valuations create a new financial signal
AI has become a significant part of investment and market valuations, especially in advanced economies. The RBI Governor, however, cautioned that overextended valuations could also turn into a vulnerability should the current cycle of AI investment slow down. A weakening of investment or earnings related to AI would lead to a steep mark-down of asset prices. Elevated risk appetite and leverage in the market would accelerate this market response.
High leverage could amplify market shocks
Another is the rising level of leverage of non-bank financial intermediaries, such as hedge funds, option sellers, and exchange-traded funds. Leverage amplifies gains in buoyant markets, but the same amplifying effect means losses in falling markets are also magnified. Malhotra said that closer linkages between banks and financial firms could also spread stress from one part of the financial system to others.
Private credit remains a vulnerability
The final hazard is private credit. In some areas, Malhotra noted a number of high-profile defaults, suggesting that standards for loans have eased. With private credit growing, any decline in borrowers’ repayment capacity would also pose broader worries for investors and institutions with a stake in the industry.
AI is altering the cyber risk environment as well
Risk five includes technology and finance. “AI is associated with fear of cyber risk, model risk, third party dependency and reduced human oversight.” -Malhotra risk five myG review Balancing risk two in one. Because modern financial systems are highly interconnected, a major cyber event could infect the rest of the industry and spread across asset classes and markets.
