Navigating stormy markets requires the compass of professionals

We asked Luca Longhi, head of Total Return Portfolio at Banca Generali, about the causes that led to the current situation.

Let's start from the epicenter of this crisis, from the first shock that has as its origin the rich California, Silicon Valley Bank: what happened and why?

"Now the contours of the story are more defined. There are at least four causes of this crisis."

Shall we summarize them?

"On the one hand, there is the little or insufficient regulation of banks with assets under 250 billion. Svb, it seems clear, moved in this shadowy area in which due oversight by regulators was also lacking due to the lack of an ad hoc law. Second point. Internal mismanagement. It turned out that there was no risk manager, a very serious fact that could not have happened in any of the European banks. With us it is an impossible thing, yet it happened. Third point. An imbalance between short-term deposits and investments in 10-year Treasury bonds. Imbalance that created liquidity problems once the run on the branches by savers started. Fourth. The California bank had and has a particular, unique target audience: a corporate clientele composed of start-ups, venture capital, and is unbalanced on cryptocurrencies. Rising rates and the flare-up of inflation put many companies on the ropes, created a mismatch, originated the crash."

With strong responsibilities of managers?

"Yes. Too many critical issues not addressed, as if adequate professional capacity was lacking."

Turning to the other side of the Atlantic, is there instead the Credit Suisse case, which, after a weekend of fire, has been resolved or almost resolved?

"A premise. In Europe, regulation is very strict. There are the Basel Accords and liquidity and capital soundness indicators to be met. Guarantees to be met, I repeat, both in the short term and in the long term. Stakes with mandatory liquidity ratios. And then there are the periodic stress tests to which all European banks are subjected. For Switzerland, things are slightly different."

To wit?

"The rules in the Swiss system are less strict and then, it should be said up front, Credit Suisse had some critical issues that had not been resolved for some time."

That they are now outdated?

"It certainly seems so. There was the issuance of a state guarantee in favor of the Ubs takeover that effectively saved Credit Suisse. Certainly the case of the At1s, bonds worth 16 billion Swiss francs that were written off, caused a stir. Bonds, those of Credit Suisse, that should have been at the bottom of the riskiness ranking and that instead, thanks to a particular agreement provided by the issuer, absorbed a risk, that is, losses, which is instead proper to equities, to equity."

A unicum then?

"Yes, a unicum. Because in general first you guarantee bondholders, who are in fact protected. In this case, on the other hand, equity holders did not have to take the loss."

Will the bond market suffer setbacks?

"A risk of disaffection is there, although, again, that of the At1s, is an isolated case. That nevertheless prompts us to a broader reflection."

That it is always appropriate, when investing money, to rely on professionals? Have those who have relied on do-it-yourselfers been burned?

"Yes. The Swiss system is different from the European system. And you have to know how to navigate the bond market well by relying on professionals: they are able to guide the investor's choices by highlighting all aspects, going into detail, going into depth, illustrating opportunities and risk profiles. Investments-and this is, after all, one of the lessons that emerges from this affair-must be balanced and diversified geographically, sectorally and thematically. Only in this way can financial products that meet various needs be identified and chosen. In the face of volatility and uncertainty, the skills of professionals are needed to navigate the often rough seas of financial markets."