Buffett shows bank CEOs how to manage risk

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Warren Buffett offers many lessons to financial company CEOs, and one of them is that they must be their institutions’ chief risk officers to avoid a crisis.

Much has been made of them Lack of a Chief Risk Officer at

SVB Finance

(ticker SIVB) for much of the last year and the bank’s ill-fated investments in government and mortgage securities. Losses in SVB’s bond portfolio, including $15 billion in its largest group of securities holdings, contributed to the bank’s demise.

While a chief risk officer performs some valuable functions, it was up to the CEO, Greg Becker, to oversee things.

Buffett, 92, fills almost every major leadership role

Berkshire Hathaway

(BRK/A, BRK/B). He is Chairman and CEO while overseeing the bank’s vast investment portfolio of approximately $350 billion in equities, $129 billion in cash and $25 billion in bonds. The idea of ​​someone else overseeing risk at Berkshire would anathema to Buffett. Berkshire’s Class A shares are down 0.5% on Thursday at $446,395.

Buffett also demonstrated how financial companies should be run in a low-interest-rate world. Buffett, who believed that bonds offered a terrible risk/reward trade-off, chooses not to buy 1% or 2% long-dated Treasury or mortgage securities

Bank of America

(BAC) and

Karl Schwab

(BLK) did. (The vast majority of Schwab’s more than $300 billion bond portfolio consists of federal mortgage securities maturing in 10 years or more. The company has said that the holdings are behaving more like a medium-term portfolio, based on a Duration, or an interest rate based sensitivity, of about four years.)

As a result, Berkshire gave up some interest income but avoided large bond losses. And Berkshire kept its bond maturities relatively short, sitting on just $45 million of paper losses on a $25 billion portfolio at the end of the year. Now the company is benefiting as it invests in Treasury bills that yield 4%. Berkshire’s interest income nearly tripled last year to $1.7 billion and is likely to at least double in 2023.

Admittedly, Berkshire is unusual. Buffett takes risks primarily by investing heavily in stocks, but Berkshire’s insurance units have a huge capital base and can sustain those investments. Insurance customers, meanwhile, cannot demand payment unless they have valid claims, unlike a bank depositor, who can withdraw money at any time. Holding stocks over bonds was also a far better move for Berkshire over the long term, and didn’t hurt much more than bonds did last year.

Buffett, of course, has tremendous autonomy, and the company isn’t under pressure from analysts or investors to hit profit targets. It would have been harder for a bank CEO to do what Buffett did and accept lower near-term earnings and take less risk in 2020 and 2021, but arguably they should have.

They are the Chief Risk Officers. finally.

Write to Andrew Bary at andrew.bary@barrons.com