1/🧵Banks and Their Fragility: Why I Avoid Investing in Banking Shares- A thread on the perilous nature of banking as an investment option. 🏦 #Investment #Banking #RiskManagement
2/🔍Banks rely heavily on leverage - borrowing to make an adequate return on equity. A 5% equity to assets ratio for a bank is leverage of 19 in debt to 1 of equity. This high leverage means when things go wrong, banks go bust quickly. #Leverage #BankingRisk
3/💡The conventional banking model relies on a principle that seems sound at first glance. Banks make small returns, usually 1-2% on their total assets. However, a significant portion of these assets is funded by depositors and bondholders, up to 95% in some cases. This…
4/🛡️If you must invest in bank shares, consider retail banks that simply take deposits, lend money to their own customers, & make payments for them. Even these aren’t immune to systemic risk, threatened by runs caused by others’ misjudgments. #SystemicRisk #RetailBanking
5/🏙️Take Hong Kong in the 1980s - after the joint declaration with China, property prices collapsed, & banks ran up bad debts. Amid this, a queue of people sheltering from rain outside a bank was mistaken for a run, fueling rumors and an actual run on the bank. #BankRun
6/🌧️That incident highlights the fragility of banks. The mere perception of instability can cause a bank to collapse, as depositors rush to withdraw their savings. This underscores the inherent risks of investing in banks. #Fragility #BankingCrisis
7/🔗In conclusion, banks’ heavy reliance on leverage and their susceptibility to systemic risk make them a risky investment option. As Terry Smith puts it, never invest in a business that requires leverage to make an adequate return on equity. #InvestmentAdvice
8/✅By steering clear of banking shares, you can avoid the inherent risks associated with this industry and safeguard your investments. Remember, it’s better to prioritize stability over potential high returns when it comes to your hard-earned money. #InvestWisely…
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