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Buffett Isn't Worried About Banks in the Coronavirus Pandemic

By Bram Berkowitz – May 3, 2020 at 11:29AM

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The legendary investor said at Berkshire Hathaway's annual meeting that the banks are in much better financial shape today than they were in the Great Recession.

The banks may have been one of the main culprits of the Great Recession, but they are in far better shape and much better capitalized during the coronavirus pandemic.

That was Warren Buffett's main takeaway on the banking sector at Berkshire Hathaway's (BRK.A 0.59%) (BRK.B 0.43%) annual shareholders meeting on May 2.

"They had done some things they shouldn't have done [in 2008], some of them, and they were certainly in far different financial condition than now. So the banking system is not the problem in this particular [situation]," Buffett said.

The 89-year-old added, "I think the banks have behaved very well and are in very good shape. ... They've built up great reserves there and built own balance sheets."

Warren Buffett

Image source: Getty Images

Following the Great Recession, lawmakers passed the Dodd-Frank Act, which required banks to hold much more capital so they could more easily stomach loan losses during an economic downturn.

For instance, all banks in the U.S. had a tier 1 capital ratio -- a measure of a bank's core capital to its total risk-weighted assets -- of about 10.7% in the third quarter of 2006, right before the Great Recession began. At the end of 2019, this number had grown to 13.29%.

Still, Buffett acknowledged that the banks could experience difficulty if economic conditions continue to deteriorate.

"You can dream of scenarios that put a lot of strain on banks, and they're not totally impossible," he said.

Several banks in Berkshire Hathaway's investment portfolio, including JPMorgan Chase (JPM -0.88%), Bank of America (BAC -1.48%), and Wells Fargo (WFC 0.05%), set aside billions of dollars in the first quarter to deal with loan losses that may begin to materialize more significantly in the coming months.

"They're going to have problems with energy loans, they're going to have extra problems with consumer credit, but they know it and they are well capitalized for it," said Buffett.

He added, "They are not a primary worry of mine at all."

 

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$401,490.00 (0.59%) $2,362.25
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$265.47 (0.43%) $1.15
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$30.57 (-1.48%) $0.46
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$105.85 (-0.88%) $0.94
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.03 (0.05%) $0.02

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