Investor or depositor? Warren Buffett sounds off on banking crisis

Warren Buffett has waded into the ongoing banking crisis that hit the United States and Europe last month.

Silicon Valley Bank was the first of several regional US banks to topple. The contagion quickly spread across the Atlantic to engulf Credit Suisse. The bank was reported to be a day from collapse itself when the Swiss government engineered a takeover by rival Swiss bank UBS.

And the turmoil continues in the US, with shares in First Republic Bank (NYSE: FRC) down a precipitous 90% since early March.

However, Warren Buffett stressed that depositors shouldn’t be worried about losing their savings.

Investors in failing banks, on the other hand, could lose their shirts.

Warren Buffett warns of further bank failures

The CEO of Berkshire Hathaway addressed the banking crisis in an interview with CNBC yesterday (overnight Aussie time).

“We are not through with bank failures,” he said (courtesy of Bloomberg).

The Oracle of Omaha said bank managers have made “dumb decisions”. But he said that was no reason for depositors to panic “about something they don’t need to be panicked about.”

“Banks go bust, but depositors aren’t going to be hurt,” Warren Buffett noted.

As for shareholders?

“They’re not going to save the stockholders,” he said in regard to whether shares in troubled banks like First Republic are now a bargain.

Much as with the Australian Government Deposit Guarantee, US depositors are protected by the Federal Deposit Insurance Corp (FDIC).

And Buffett wanted to dispel some common misperceptions about the FDIC’s funding base:

The public has the impression the FDIC is the US government. But the cost of the FDIC, including the cost of their employees and everything, are borne by the banks. So banks have never cost the federal government a dime.

Berkshire has divested most of its bank holdings in recent years, with the notable exception of Bank of America Corp (NYSE: BAC) thanks to the strength of the bank’s CEO, Brian Moynihan.

“I like Brian Moynihan enormously. I just don’t want to sell it,” the Berkshire CEO said.

As for Berkshire’s investing philosophy going forward, that will remain vintage Warren Buffett, turning a largely blind eye to macroeconomic developments.

“We haven’t changed our course in 58 years,” he said. “We want to buy good businesses that are run by people we like and trust at a decent price, and we’ll keep doing that. And we’ll keep buying Treasury bills every Monday.”

How about our own big four banks?

Warren Buffet may well be right about more bank failures ahead for some troubled US institutions.

But here in Australia, the big four S&P/ASX 200 Index (ASX: XJO) banks – Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) – are in the best shape of any banks in the world.

That’s going by their Common Equity Tier 1 (CET1) ratio, which measures the core equity capital of a bank in comparison to its risk-weighted assets.

The Australian Prudential Regulation Authority (APRA) requires the banks to have a minimum 10.25% CET1 ratio.

And in good news for Aussie investors, all of the big four banks currently are well ahead of that 10.25% ratio.

The post Investor or depositor? Warren Buffett sounds off on banking crisis appeared first on The Motley Fool Australia.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bank of America. The Motley Fool Australia has recommended Westpac Banking. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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