RBI flags fragility of institutions, stresses need for robust regulation

Risk is underpriced during booms, asset bubbles form

- Business Desk

RBI Governor Sanjay Malhotra on Thursday underscored the inherent fragility of financial institutions, warning that a loss of confidence can swiftly trigger bank runs and transform liquidity stress into solvency crisis.

Delivering the Second V. K. R. V. Rao Memorial Lecture at the Delhi School of Economics in New Delhi, he said banks, unlike manufacturing units, cannot be shut temporarily and must be resolved immediately to prevent contagion.

Malhotra highlighted that financial regulation operates within a fundamentally different framework from other sectors because financial institutions perform maturity and liquidity transformation— accepting short-term deposits while extending long-term loans. This structure, he said, makes banks vulnerable to panic-driven withdrawals that can spread rapidly across the financial system.