Kotak AMC MD Nilesh Shah on SVB crisis, Fed's balancing act

Social media is abuzz with comparisons between the recent Silicon Valley Bank (SVB)) crisis and the 2008 Lehman, but is it one of those moments or just hogwash? Can we just dismiss it with a big no?

The SVB saga is "undoubtedly" not a Lehman Brothers movement, Nilesh Shah, Managing Director at Kotak AMC, said in an interview with ETNow. Dispelling this notion taking ground in social media, Shah said that it was not the case on two counts -- post Lehman Brothers moment, US Federal Reserve introduced the Dodd-Frank Act, which took away some of the luxuries which the financial sector in the US had earlier in terms of leverage. Secondly, Fed's supervision has increased substantially on what is “systematically
important financial institutions,” he added.


"Social media obviously is in overdrive," he further added that it will keep spreading rumors.

(Also Read: Not banks, chit funds & ponzi schemes are SVB of India: Nilesh Shah)

"If you want a living example of (being caught) between the devil and deep sea, there is no better example than Jerome Powell," Shah said.

"He is doing tremendous balancing. If he raises interest rates, it over-leverages the US government, and households carry the burden. If he does not raise interest rates, inflation does not come under control. Unlike Paul Walker in the 80s, who had the luxury of raising real interest rates to 10% and nominal US interest rates to double digits because the debt to GDP ratio of the US was far lower, Powell does not have that luxury, and he is playing a game which is very-very delicate balancing," Shah said.

"On one side, he has raised interest rates at the fastest pace in US history. On the other end, he has been relatively slow in taking away excess liquidity from the banking system. The Fed expanded the balance sheet by $4.8 trillion, rounded off between 2008 and 2022, and now they have taken out about $600 billion. So over 2008, there is still $4 trillion-plus liquidity in the banking system," Shah elaborated.

"So Fed was hoping that by raising rates, inflation would come under control, but by not taking away liquidity as quickly as possible, hopefully the growth will not go into severe recession or depression, and it might just be a mild recession. For this strategy to succeed, the Fed had to ensure that there was no accident," Shah said

He added that, unfortunately, SVB created a jolt for Fed. Now, the Fed, US Treasury, and FDIC have tried to tackle the SVB and Signature crisis. Hopefully, the Fed will be driven by data dependency. They will carefully evaluate all the incoming data to take a call on whether they should keep rates higher and for longer," Shah said.

He, however, advised exercising caution by the Fed in segments like housing, technology, and start-ups where the Fed's impact of raising interest rates is visible.

He said that his feeling was that while the Fed will be showing the stick by raising interest rates and tightening liquidity, hoping that this will curb the demand, it will continue to provide liquidity, hoping that SVB kind of accidents does not occur.

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