Warren Buffett has suggested that “we’re not through with bank failures”. However, depositors need not be concerned. So, what exactly did Warren Buffett say? And, what are the trading implications
Warren Buffett’s main comments on the banking crisis
Warren Buffett suggested that more banks might fail. He specifically alluded to issues with banks’ balance sheets and the problem of assets being held above their true value. This could imply solvency issues: if there is a rapid deposit outflow, banks might not be able to meet all those deposits. It could also generate cash flow issues if those loans have a lower interest rate than banks must pay to raise funding.
Should depositors worry? Warren Buffett suggested that depositors need not worry about collapses. Implicitly, he assumes that the FDIC will insure all deposits. This implies that any bank failure might be regarded as a systemically impactful event, forcing the FDIC to intervene. This is paradoxical since Warren Buffett also suggested that banks might fail. Indeed, if all deposits are insured, then there is no reason for a bank run; and thus, no reason for a failure.
Who pays for the banking issues? SVB and Signature Bank depositors were “bailed out” and their deposits fully insured. A narrative persists that the tax payer has bailed out the bank or depositors. Warren Buffett has countered this narrative. He notes that the banks failed and shareholders were wiped out. He also highlights that banks – not the government – fund FDIC insurance. Thus, taxpayers do not directly fund the deposit insurance.
Why did Warren Buffett sell bank stocks? Why then did Warren Buffett sell bank stocks? He was circumspect. However, he indicated a general wariness of banks’ balance sheets, overall. This applies to large banks, not merely small banks. Warren Buffett did not indicate that any of his former holding would face financial disagrees. However, he did suggest that they were less attractive than he previously thought. Hi signaled confidence in Bank of America, owing to his belief in Brian Moynihan and the Bank of America Team.
