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Rajan Says Banks Must Avoid ‘Crazy Risk-Taking’: Tom Keene

Banks must avoid “crazy risk-taking” as built-up capital pushes them toward more lending, said Raghuram Rajan, former chief economist at the International Monetary Fund.

“At some point the amount of capital that the banks are building up will start burning a hole in their pocket and they will start moving to lend,” Rajan said today in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The key again is manageable, sensible risk, rather than crazy risk-taking.”

Rajan pointed to the example of UBS AG, which was hit by a $2.3 billion trading loss at its investment bank.

“How did this guy get away with $2.3 billion worth of losses?” said Rajan, 48, now a professor at the University of Chicago’s Booth School of Business. “That boggles the imagination, especially after what UBS has been through.”

Bank of America Corp. and Morgan Stanley leapfrogged UBS during the credit crisis after record writedowns and a U.S. probe into whether Switzerland’s biggest bank helped American clients evade taxes.

“The problem comes, as we saw recently, when you lose control of the risk-management process as in UBS. There you worry that despite all the talk, we still haven’t gotten full control of how traders take risk and manage that process in a way that you limit the kind of losses that you see with UBS,” Rajan said.

Rajan said that the “good news” is that banks are “a little more risk-averse” than they were in 2007 and 2008.

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