Buffett says bank runs would have been ‘catastrophic’ if not for deposit guarantee

Warren Buffett said there would have been “catastrophic” consequences if US regulators had not insured the deposits at Silicon Valley Bank and Signature Bank, as their failures risked sparking a run at lenders across the country.

“Even though the FDIC [Federal Deposit Insurance Corporation] limit is $250,000 . . . that is not the way the US is going to behave anymore than they’re going to let the debt ceiling let the world go into turmoil,” the Berkshire Hathaway chief executive told tens of thousands of shareholders gathered in downtown Omaha for the company’s annual meeting on Saturday.

The comments follow a series of bank failures in the US that have stoked debate over the intervention of the federal government, which safeguarded deposits at both SVB and Signature Bank above the $250,000 level covered by federal insurance.

Regulators were able to bypass that limit by designating both as systemic risks. While shares of regional banks have swung wildly in recent trading sessions, depositors have been somewhat calmed by the implicit guarantee that the government would intervene in the crisis.

“I can’t imagine anybody in the administration or Congress or Federal Reserve . . . saying I’d like to be the one to go on television tomorrow and explain to the American public why we’re only keeping $250,000 insured,” Buffett added. “It would start a run on every bank.”

Berkshire has been pressed on the state of the banking system, with Buffett telling CNBC last month that the country was not “over bank failures, but depositors haven’t had a crisis”.

The sprawling industrials-to-insurance conglomerate had previously used its balance sheet, which Buffett has likened to a fortress, to invest in struggling financial institutions. Berkshire invested in both Goldman Sachs and Bank of America during the financial crisis.

However, so far it has not stepped in during the current crisis. Investors have noted that Berkshire’s portfolio already has positions in a number of large financial institutions.

Advisers to First Republic, which was sold this month to JPMorgan Chase in a deal orchestrated by US regulators, have told the FT that an investment by Berkshire in the bank had been seen as an unlikely solution.

That was due to the rapid deposit flight First Republic was suffering. Advisers believed the bank would burn through a multibillion-dollar capital infusion if the Berkshire investment was not enough to shore up confidence.

Buffett said that the potential for depositors to quickly move money out of a bank made Berkshire far more “cautious” than in previous financial crises. He warned: “the fear is contagious.”

The American people are “probably as confused about banking as ever and that has consequences,” he added.

“You don’t know what happened to the stickiness of deposits at all . . . and that changes everything. You can have a run in a few seconds.”

The so-called Oracle of Omaha said some of the issues in the banking system could be seen by anyone willing to dive through the annual reports of the banks that have already failed, pointing to the jumbo-mortgages written by First Republic at low interest rates.

The Fed has blamed weakened regulations during the Trump administration, as well as failures by supervisors, for the inadequate risk management processes that ultimately led to SVB’s demise.

Buffett added that while Berkshire had been on the sidelines, it had the capital ready in case an opportunity presented itself.

“We keep our money in cash and Treasury bills at Berkshire . . . because we want to be there if the banking system even temporarily gets stalled,” he said. “I don’t think it will, but it could.”

Buffett spent Saturday morning answering questions from shareholders that touched on estate planning, value investing, US-China relations and, more critical than any other to those assembled at the CHI Health Center in downtown Omaha, succession at Berkshire.

The 92-year-old investor confirmed that Greg Abel, the company’s vice-chair charged with running all of its businesses outside of insurance, remained his anointed successor.

“Everyone talks about the executive bench, which is baloney,” he added. “We don’t have that many people that could run five of the largest GAAP net-worth companies and all kinds of diverse businesses.”

Abel has been with the company for more than two decades, when Berkshire acquired utility MidAmerican Energy in 2000. In 2018, he was elevated to vice-chair alongside Ajit Jain.

Charlie Munger, Buffett’s longtime right-hand man and the company’s vice-chair, added there was one reason Berkshire had outperformed other large conglomerates.

“We change managers way less frequently than other people do and that’s helped us,” he said.