Warren Buffett thinks most banks are a horrible investment - here's why

Warren Buffett has substantially reduced his investments in banks over the past few years, stating that he feels that banks are doing a horrible job of protecting consumer assets.


Duration mismatching refers to the situation where a bank's liabilities (such as customer deposits) have a different maturity or duration than its assets (such as loans or investments). This creates a risk for banks because if interest rates change, it can lead to a mismatch in the bank's cash inflows and outflows, which can affect its profitability and solvency.

The following are some risks of duration mismatching for banks:

Interest rate risk: If a bank's assets have a longer duration than its liabilities, it is exposed to interest rate risk. This means that if interest rates rise, the bank's cost of funds will increase, but the interest income it earns from its assets will not increase proportionately. This can lead to a reduction in the bank's net interest margin and profitability. Conversely, if interest rates fall, the bank's interest income will decrease, but its cost of funds will remain the same, which can also impact the bank's profitability.

Liquidity risk: If a bank has a duration mismatch between its assets and liabilities, it can also create a liquidity risk. This means that if customers start withdrawing their deposits or other short-term funding sources, the bank may not have sufficient cash inflows to meet its obligations. This can lead to the bank having to sell its longer-term assets at a loss to raise funds or borrow from the market at a higher cost, which can further erode its profitability.

Credit risk: Duration mismatching can also increase a bank's credit risk. This happens when the bank's assets, such as loans, have a longer duration than its liabilities, such as customer deposits. In this case, the bank may have to roll over or refinance its loans before the deposits mature. If the market conditions are unfavorable, the bank may not be able to refinance its loans or may have to refinance them at a higher cost. This can lead to a default on the bank's loans and ultimately, to a loss.

In summary, duration mismatching can put banks at risk of having financial problems because it exposes them to interest rate risk, liquidity risk, and credit risk. Therefore, banks should carefully manage their asset and liability durations to avoid these risks and maintain their financial stability.