Massimo Malvestio is an experienced lawyer with extensive knowledge in legal and financial matters. In an interview with “VeneziePost”, he has highlighted the negative effects generated by an inflation wave in the current economic context. He had already discussed the concrete possibilities of an inflationary crisis two years ago, and confirmed those concerns in a subsequent interview a year later. Today, Massimo Malvestio warns that the crisis risks becoming systemic, and for this reason, public rescue will once again play an important role. This is because the risks for insurance and banking institutions are becoming increasingly relevant, and only a sudden slowdown in inflation can mitigate the situation.
“Losses are already here”, explained the expert, and public intervention “will be inevitable, as it was for Silicon Valley Bank and Credit Suisse, if the increasingly precarious balance on which the system relies is broken”. Should we therefore speak of a systemic crisis? As pointed out by Massimo Malvestio, if we look at the European area, Deutsche Bank’s situation is “currently only a stock market crisis”, while Aareal Bank and Deutsche Pfandbriefbank present a more serious issue, as they manage large assets and have not called their AT1 loans at maturity. This adds “a further shadow to this type of contribution to banks’ risk capital”, the expert said. Expanding on this, he noted that “there will be no private capital either for capital increases or for other forms of contribution of real risk capital from the banks. And this is a seriously anomalous fact that shows a crisis”.
Several factors are significantly impacting this situation. One of these is the inadequate response to the Lehman crisis and subsequent legislation, as well as the role of regulators. Another factor is the increased liquidity in the market, which has led to lower rates and incentivized banks to buy low-quality long-term securities. However, the primary problem today is “the capital losses in the securities portfolios of banks and insurance companies”.
In the interview, Massimo Malvestio also stressed that it is impossible to analyze the situation of Italian and European banks due to the lack of transparency and sufficient data. Only those within the bank-regulator system can make informed judgments. Furthermore, “balance sheets are outdated and insufficient, considering the volatility of recent months and the scope of data they provide”. The same applies to insurance companies, which are equally susceptible to potential losses and facing a crisis.
There exists a possibility of a crisis similar to the one that occurred in 2008, due to the inflation issue, which can only be resolved if the system manages to curb it. This would allow central banks to lower interest rates with ease and resort to their preferred activity of printing money. As Massimo Malvestio explained, the securities that gave rise to this crisis could then be revalued, ultimately resolving the problem at hand.
The expert concluded that in situations like the current one, transparency would be “the ideal approach”, although he acknowledged that this is not favored by regulators. Ultimately, a solution must be sought, and resorting to public funds may be necessary, leading to taxpayer contributions. Despite the potential costs and potential emergence of unjust solutions, “it remains the most convenient option compared to a banking crisis”, he said in conclusion.