Warren Buffet Bets $1 Million That No American Will Lose Money in Coming Bank Failures

Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks during a game of bridge following the annual Berkshire Hathaway shareholders meeting in Omaha, Neb., on May 5, 2019. (Nati Harnik/AP Photo)

Billionaire investor Warren Buffett predicts more U.S. banks will fail, yet he’s so confident that not a single American depositor will lose any money in a bank collapse thanks to federal deposit insurance that he’s willing to bet $1 million on that outcome.

“We’re not through with bank failures,” Buffett said in an interview on CNBC’s “Squawk Box” on Wednesday when asked about his thoughts on the banking sector crisis that was precipitated by the recent collapse of Silicon Valley Bank (SVB).

But while the turmoil following the collapse of SVB—and later Signature Bank—may have wiped out shareholders and bank debt holders, Buffett said that everyday Americans who kept their savings in the collapsed financial institutions have been immune.

“Depositors haven’t had a crisis,” he said, referring to the fact that people who kept their savings at the two failed banks haven’t lost a dime thanks to deposit guarantees by the Federal Deposit Insurance Corporation (FDIC).

‘Depositors Aren’t Going to Be Hurt’

The FDIC was created by the Banking Act of 1933, during the Great Depression, after some 2,000 banks failed to protect people from losing their savings and to restore confidence in the banking sector.

Normally, the FDIC insures deposits up to a coverage limit of $250,000 per depositor. But in the cases of SVB and Signature, which each had an unusually large proportion of uninsured deposits above the $250,000 cap, the FDIC took the extraordinary step of expanding its guarantees to cover all deposits fully.

“The owners of the banks may have lost a hell of a lot of money. The people that bought the debt of the holding company, they may lose a lot of money,” Buffett said, but depositors at the two failed banks didn’t lose any of their savings.

“You don’t need to turn a dumb decision by managers into a panic in the whole citizenry of the United States about something they don’t need to be panicked about,” he said.

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

Buffett’s $1 Million Deposit Guarantee Bet

Buffett said he’s confident that a similar move to expand deposit guarantees above the $250,000 cap, as was done with SVB and Signature, would likely take place if there were a need to stem a depositor panic in the event of major turbulence.

The deposit coverage limits at SVB and Signature were raised on the basis of special determinations that the collapses posed a risk to financial stability. A broader, system-wide increase of the deposit insurance cap would require congressional approval, which Buffett thinks would get the green light if need be.

“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,” he said.

In fact, Buffet is so confident that the deposit insurance system will operate soundly during what he predicts are more bank failures in the United States that he’s offered to bet $1 million on that outcome.

“You’re saying that you'll put up $1 million against anybody who’s willing to take the other side of the bet that no depositor in a U.S. bank will lose money in the next year?” asked the interviewer.

Buffet confirmed the terms of the wager: “A year from now, whichever one of us has won, gets to decide what charity the $2 million goes to,” he said.

‘Special Assessment’

The FDIC’s deposit insurance fund is funded through fees it charges insured banks, as well as the interest the FDIC earns on its investment of those funds in U.S. government obligations, like Treasury bills.

As of the end of last year, the deposit insurance fund balance stood at $128.2 billion. The failures of SVB and Signature cost the FDIC an estimated $23 billion, though this could be reduced when the FDIC completes the sales of SVB and Signature assets.

The FDIC can recover the money it spent on the failures through a “special assessment” or fee on insured banks to replenish its deposit insurance fund. The agency has broad authority in setting the assessment, and it remains an open question what it will ultimately look like.

At the same time, more than $9.2 trillion of U.S. bank deposits were uninsured at the end of last year, meaning those above the FDIC’s coverage limit of $250,000 per depositor. That means around 43 percent of all bank deposits in the United States aren’t insured.

Some critics have raised concerns that the pot of money in the FDIC’s deposit insurance fund is a relatively small fraction of overall deposits and would be insufficient to reimburse depositors in case of multiple big bank failures.

However, the FDIC has multiple emergency liquidity arrangements in place that it could tap in extreme cases. This includes a line of credit from the U.S. Treasury, borrowing from the Federal Reserve, additional special assessments on banks, and the ability to issue debt.