Warren Buffett’s $1 million bank bet

Warren Buffett has made a $1 million bet that no depositor will lose money from a bank failure in the United States over the next year. 

This “firm offer” was made in an interview on CNBC during Buffett’s trip to Japan to visit trading houses where Berkshire Hathaway owns a stake. 

Buffett’s bet is open to anyone willing to put $1 million on the line, with the proceeds going to charity. 

The collapse of Silicon Valley Bank in March 2023 was the second-biggest banking failure in the history of the United States and the largest since the 2008 crisis.

SVB’s collapse followed that of Silvergate Bank and precipitated the failure of Signature Bank, the third-largest bank failure in US history. First Republic Bank also came under stress.

The contagion spread to Europe, with Credit Suisse under stress and eventually sold to its rival, UBS.

These collapses and stress have led to fears of another Great Financial Crisis similar to 2008, with systemically important banks, such as Deutsche Bank, coming under pressure.

However, Buffett says that the banks have not made the same mistakes they did in 2008. Instead, they have mismatched assets and liabilities – a constant risk in banking. 

Banks will always make mistakes at some point. “That is just part of the game,” Buffett said. Good management will reduce the number of errors and their severity. 

And so, the world is not through with bank crises, but “we are through with the depositor losing money”. 

Today, depositors have “no reason” to worry about losing money in their bank accounts. 

Owners of banks and debt instruments linked to banks will lose money in times of crisis but not depositors. “Banks can go bust, but depositors are not going to be hurt,” said Buffett. 

This is because of innovations in regulation and depositor insurance, notably the Federal Deposit Insurance Corporation (FDIC), which insures all deposits in America up to $250,000.

The FDIC is government-run, but private banks finance it. Thus, paying out deposits “will not cost the government a penny”. 

Buffett no longer big on banks 

Buffett has been steadily reducing his holdings in various American banks. Berkshire has sold shares in US Bancorp, Wells Fargo, Goldman Sachs, JP Morgan, and PNC.

This does not mean that these banks are not well-run, but they can get in trouble if they continue doing what they did. 

“I do not like the banking business as well as I did before,” the superinvestor said. The system is no longer good at connecting the punishment to the culprits. 

Accounting procedures “have driven some banks to do things that help their current earnings” but harm the sustainability of the business. 

“I do not like it when people get too focussed on the earnings number and forget basic banking principles,” he said.

However, Buffett has kept his stake in Bank of America worth $34.2 billion. He said this is because he likes the management of the bank and its conservative approach.