Is it safe to buy UK bank shares?

According to Warren Buffett, the first rule of investing is to avoid losing money. The only way to do this is to understand the risks and what can go wrong when finding stocks to buy.

Currently, shares in British banks are trading at some very attractive prices. But while I think this could be a great opportunity, I think the risks are real and important.

Risk

First, let’s understand what these risks are and why investors should take them seriously.

In the short term, the biggest risk facing UK banks is that a liquidity crunch could lead to their failure. If that happens, it will be a disaster for shareholders.

I have heard two main lines of response to this risk in the news recently. I did not find one convincing.

the law

The first is that UK banks (especially the bigger ones) have faced tougher regulation since 2008 and this will prevent them from failing. I think this is clearly wrong.

Indeed, the banking sector is more carefully regulated than ever before. But no two crises are alike, and SVB Financial in the US didn’t fail because its assets went bad – it failed because it didn’t have enough liquidity.

That is why I do not see that regulations designed to prevent a repeat of the 2008 crisis have any relevance to the current situation. The threat to the banking sector now comes from liquidity, not bad loans.

important

Another response I heard was that the big banks on both sides of the Atlantic are very important. So central banks and/or governments in each case have no choice but to encourage it if necessary.

I think it’s probably true, but I don’t think it’s beneficial for shareholders. SVB’s financial example looks like this.

In the US, customers who have deposits with SVB are – to some extent – already protected. But as far as I can see, the shareholders of the bank are not exempted in any way.

The fact that the authorities must protect bank customers does not mean that the banks – or their shareholders – will receive any support. So, I don’t think this response is bad.

Risk and reward

I think many investors think that UK banks – especially the biggest and most important ones – cannot fail. And I feel guilty.

In my opinion, all these problems are one and the same. Will customers of UK banks demand their deposits in a way that leads to a liquidity crisis?

If they are, then I think the banks and their shareholders are in big trouble. If not, this is a great opportunity to buy shares in a British bank.

I am of the view that they are not. US bank failures stem from tech start-ups that require more deposits and UK banks have less exposure to the business.

I’m the one who shares in the UK banks that are a bargain now. But the risk is serious and I take it seriously.