Warren Buffett on the Banking Crisis: "We're not through with bank failures yet"

Buffett's thoughts on the recent bank failures and whether this is another financial crisis in the making

In a recent CNBC interview, Warren Buffett was asked about the major bank failures and if he thought this was another financial crisis about to unfold.

His response may surprise you…

Buffett On The Banks

As a long time investor in multiple bank stocks throughout the years, legendary investor Warren Buffett knows a thing or two about how these businesses operate and make money.

But the banking sector has been under a lot of scrutiny lately as multiple large financial institutions have completely failed due to corporate mismanagement that ultimately resulted in runs on the banks.

These unprecedented events have forced all investors to take another look at the banking sector as a whole and Buffett is no different. Here’s what he had to say about the current state of the banking system:

More Bank Failures to Come?

Buffett said that he believes more bank failures are likely to occur. But he also made it very clear that depositors have nothing to worry about.

“Banks go bust. But depositors aren’t going to be hurt.”

He explained that the current economic environment is uncovering the dumb moves made by bankers attempting to increase their earnings.

“They haven’t made the same sort of mistakes as they did in 2008-2009, but they have mismatched assets and liabilities in a major way.”

For example, they took customer deposits that could be withdrawn immediately and used them to buy long-dated government bonds and mortgage-backed securities that are highly affected by interest rates. Silicon Valley Bank did exactly that, and then collapsed under a wave of withdrawals in March.

Red Flags

Warren Buffett has actually dumped his stakes in several banks over the last 2-3 years because they were taking "dumb" risks and using deceptive accounting to flatter their earnings. He believed they would ultimately pay for their misdeeds and now it seems that they are.

Some of the red flags Buffett noticed in financial statements were that several banks were valuing their assets at cost instead of market value. This is done on purpose in an effort to artificially inflate profits and mislead investors and analysts.

"I don't like it when people get too focused on the earnings number, and forget what in my view are basic banking principles."

Buffett declined to mention which banks he spotted the red flags in, but he wanted to make clear that just because he sold a bank’s stock didn’t mean that it was a poorly run company.

However, he’s clearly been trying to reduce his exposure to the sector in general for some time now. Take a look at this chart showing his portfolio allocation to bank stocks from Q4 2019 to Q4 2022.

Depositors Shouldn’t Worry

One of the biggest points that Buffett wanted to make during his interview was that depositors didn’t need to panic or fear losing their money being held in the banks.

“Nobody is going to lose money on a deposit in a US bank. It’s not going to happen.”

Buffett confidently made this statement and then added:

“You don’t need to turn a dumb decision by bank managers into panicking the whole citizenry of the United States about something they don’t need to be panicked about.”

Depositor Money is Protected

He also reiterated that the FDIC (Federal Deposit Insurance Corporation) exists for this very reason.

The FDIC was created to protect depositors from these types of failures while also helping banks retain the confidence of the public by providing them with peace of mind that their money is insured. Read more on FDIC insurance here

Buffet pointed out that much of the public is under the false impression that these failures will cost the US government a lot of money. But he wanted to make it very clear that’s simply not true.

“The costs of FDIC insurance are covered by the banks. Banks themselves have never cost the federal government a dime.”

He’s referring to how the FDIC is set up. While it is a federally regulated insurance corporation, it’s not federally funded. That’s a BIG DIFFERENCE.

Funding for the FDIC comes from premiums paid out by the banks and savings corporations, not from government spending.

Conclusion

Buffett ended his interview with some insightful thoughts for the average person who may be scared of these recent bank failures.

“People shouldn’t be worried about losing their money and the deposits they have in an American bank, and today they have no reason to worry.”

Buffett’s comments in this interview offered a more positive perspective on the current banking crisis from someone who knows the sector better than anyone.

It was nice to hear that he’s still very confident in the system as a whole, especially in the FDIC. His outlook should give people more confidence and peace of mind that their deposited money is protected against any more unprecedented bank failures.

Though it’s very important for investors to also take what he said about the banking sector into account. While he’s confident that depositors will be protected from further fallout, the same cannot be said about bank stock shareholders.

Poor decisions made by a bank’s corporate management team can result in huge losses for shareholders. So if your portfolio has an allocation to individual bank stocks, it may be time to revisit those holdings and check in on the bank’s financials to ensure its still a stock that you want to own.

Knowledge is Power

It’s so important to understand what’s happening with our financial system and why. I hope this article broke it down in a very easy to understand way and helps you feel more confident in your own financial plan.

These are unprecedented times we’re in, but those who stay informed will be in a good place to get through it all. I hope this weekly newsletter can be your way of staying in-the-know and confident with your financial plan.

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