Buffett quotes about bank runs, bailouts, insurance

Warren Buffett. Bill Pugliano/Getty

Three banks closed last week, fueling fears of a banking crisis and financial firestorm.
Warren Buffett has dabbled in bankruns, bailouts, and deposit insurance over the years.
Here are nine of Buffett’s most relevant and insightful quotes about banks.

Silicon Valley Bank, Signature Bank and Silvergate have all collapsed in the past few days, stoking fears of a banking sector collapse and a full-blown financial crisis.

Warren Buffett, the world-renowned stockpicker who runs Berkshire Hathaway, has studied and invested in banks for more than five decades. Some of his earlier statements are strikingly relevant to the current frenzy over bank runs, government bailouts, deposit insurance and poor risk management.

Here are Buffett’s 9 best banking quotes, edited slightly for length and clarity:

1. “It’s a business that can be a very good business if run properly. There is no magic behind it. You just have to stay away from stupid things. It’s a bit like investing wisely. You just have to avoid doing things that are godlessly stupid.” (1996)

2. “Banking is not a favorite of ours. When assets are 20 times equity – a common ratio in this industry – mistakes affecting only a small portion of assets can destroy a large portion of equity. And mistakes were the rule rather than the exception at many big banks. In lending, many bankers played follow-the-leader with a lemming-like zeal, now they face a lemming-like fate.” (1990)

3. “When you’re panicking, you have to have someone somewhere who can say and who can be believed and rightly believed that he or she will do whatever it takes.” (2015)

4. “In the old days, the only way to really stop a bank run was for someone to come along and stockpile gold. They ran it to the branches that had a problem. The bank came out and said, ‘Our Basel II ratio is 11.4 percent,’ the line would only get longer. It wouldn’t get the job done. Gold did the job.” (2015)

5. “It’s usually a risky business to lend long-term at fixed rates and lend short-term like we did at Clayton. Over the years, a number of important financial institutions have gone bankrupt in the process. However, at Berkshire, we have a natural balance that our companies always hold at least $20 billion in cash equivalents earn short-term interest rates. From a banking perspective, Berkshire is and will remain highly asset sensitive and will consequently benefit from rising interest rates.” (SVB ran into trouble for investing its interest rate risk in long-term bonds without adequate hedging on deposits that could be withdrawn immediately.) (2015)

6. “Right now it’s far better to be a financial cripple with a government guarantee than a Gibraltar without.” (Buffett complained that banks with FDIC-insured deposits and other government-guaranteed lenders had minimal cash costs and could easily borrow. In contrast, companies like Berkshire with AAA ratings and solid balance sheets found it harder and more expensive to borrow. ) (2008)

7. “When faced with large revenue shortfalls, communities that have all of their bonds insured will be more apt to devise “solutions” that are less favorable to bondholders than communities that have uninsured bonds that local banks and residents.” (Buffett claimed that people work harder to minimize losses that affect their communities than when losses are borne by large insurers or the government. His comment addresses the risk of “moral hazard” which assumes state-guaranteed bank deposits.) (2008)

8. “Before the Fed was formed, the failure of weak banks sometimes made sudden and unforeseen liquidity demands on previously strong banks, which in turn caused them to fail. The Fed is now isolating the strong from the problems of the weak.”

9. “The behavior of the banker should at least correspond to that of a responsible bartender who, if necessary, refuses to profit from the next drink, so as not to send a drunk down the highway.” In recent years, unfortunately, many leading investment firms have found that morality the bartender is an unbearably restrictive standard. Recently, those who have traveled the High Road on Wall Street have not encountered heavy traffic.

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