In keeping with Warren Buffett, the primary rule of investing is to keep away from shedding cash. The one manner to do that is to know the dangers and what may go improper when discovering shares to purchase. 

Proper now, shares in UK banks are buying and selling at some actually enticing costs. However whereas I feel this could possibly be an excellent alternative, it appears to me just like the dangers concerned are each actual and vital..

Dangers

Initially, let’s get clear on what the dangers are and why buyers ought to take them critically. 

Within the quick time period, the most important danger going through UK banks is {that a} liquidity disaster may trigger them to fail. If that occurs, it could be a catastrophe for shareholders.

I’ve heard two main traces of response to this danger within the information lately. I don’t discover both one convincing.

Regulation

The primary is that the UK banks (particularly the larger banks) have confronted harder laws since 2008 and these will stop them from failing. I feel that is clearly mistaken.

It’s true that the banking sector is extra fastidiously regulated than it was. However no two crises are the identical, and SVB Monetary within the US didn’t fail as a result of its property went dangerous – it failed as a result of it didn’t have sufficient liquidity.

That’s why I don’t see that the laws designed to forestall a repeat of the 2008 disaster have any relevance to the present state of affairs. The risk to the banking sector for the time being comes from liquidity, not loans going dangerous.

Significance

The opposite response I’ve heard is that the massive banks on each side of the Atlantic are extraordinarily vital. So the central banks and/or governments in every case may have no alternative however to shore them up if needed.

I feel that is in all probability true, however I don’t suppose that’s any use to shareholders. The instance of SVB monetary appears to bear this out. 

Within the US, prospects who had deposits with SVB have – to some extent – been protected. However so far as I can see, the financial institution’s shareholders haven’t been bailed out in any manner.

The truth that authorities may need to guard financial institution prospects doesn’t entail that the banks themselves – or their shareholders – will obtain any sort of help. So I don’t suppose this line of response is any good, both.

Dangers and rewards

I feel plenty of buyers are taking the view that the UK banks – particularly the most important and most vital ones – merely can’t fail. And I feel they’re useless improper.

In my opinion, the complete challenge comes down to 1 factor and one factor alone. Are the purchasers of the UK banks about to demand their deposits in a manner that causes a liquidity disaster?

If they’re, then I feel the banks and their shareholders are in massive bother. In the event that they aren’t, then it is a terrific alternative to purchase shares in UK banks.

I’m of the view that they aren’t. The US financial institution failures got here from tech start-ups needing their deposits again and UK banks have a lot much less publicity to those companies.

I feel that shares in UK banks are a cut price proper now. However the dangers are severe and I’m taking them extraordinarily critically.