Is CHARLES SCHWAB In Financial Trouble - Your Thoughts on the Subject??

[mholdi1540]

With the recent headlines on TV and social media that CS may have been over extended in bonds that could lead to a collapse is anyone worried or is it more hype. Last night a segment on Fast Money discussed this topic and even though analyst were still rating the stock as a buy. I have 7 figure total of bond funds, individual stocks and cash but at my age it would be a devastating loss to any portion of it with no time left to build it back. Has anyone considered moving funds to Fidelity or Vanguard?? Your insight would be appreciated !!

[alex_686]

This would be about Schwab’s bank, a separate entity. That could go down and would have zero affect on you. Your assets are segregated in its own accord. Fund’s assets are segregated in a another account.

[dad2000]

All of Schwab failing? Hype.

Have FDIC or NCUA insured accounts at 2 different banks (Schwab being one) for your cash and/or emergency funds.

Your securities are separate. You own them. As an additional safeguard, there is SIPC insurance of up to $500k.

[HawkeyePierce]

Schwab is my primary bank and broker. I am not concerned and am making no changes.

Even if they go under, which I don’t think will happen, I won’t lose a dime. My assets will be fine and the bank accounts are FDIC insured.

[retiringwhen]

I personally would not own any common stock in SCHW though. Their business model has been evolved to derive most of their profit from arbitrage of low interest rate deposits in FDIC insured sweep accounts. That model is failing before our eyes. They do have serious problems to address.

I do believe investors money is safe due to regulatory compliance and FDIC, SIPCS, etc., but shareholder equity in Schwab is definitely at significant risk.

[afan]

As long as you keep your cash in Schwab Bank under the FDIC limit, then failure of the bank would not result in any loss of money in the bank.

Collapse of Schwab Bank might be a problem for the larger Schwab entity, and hence for its shareholders. But collapse of the bank, it it were to happen, would not create any risk for your assets in the broker- unless you held Schwab stock.

Collapse of the bank would not cause the broker to collapse. But if the broker were to collapse, your assets would still be safe.

I do not speculate on individual stocks, so no opinion as to whether the price is too high or too low for the current risk.

The least important consideration is SIPC coverage. This comes into play if there are assets missing from your brokerage account, typically due to fraud. Nothing about the bank suggests that its collapse would lead the broker to misplace your brokerage holdings. I would not worry about that at all.

[pizzy]

With the recent headlines on TV and social media that CS may have been over extended in bonds that could lead to a collapse is anyone worried or is it more hype. Last night a segment on Fast Money discussed this topic and even though analyst were still rating the stock as a buy. I have 7 figure total of bond funds, individual stocks and cash but at my age it would be a devastating loss to any portion of it with no time left to build it back. Has anyone considered moving funds to Fidelity or Vanguard?? Your insight would be appreciated !!

My thoughts are Charles Schwab is not in financial trouble.

[Mr. Buzzkill]

I personally would not own any common stock in SCHW though. Their business model has been evolved to derive most of their profit from arbitrage of low interest rate deposits in FDIC insured sweep accounts. That model is failing before our eyes. They do have serious problems to address.

I do believe investors money is safe due to regulatory compliance and FDIC, SIPCS, etc., but shareholder equity in Schwab is definitely at significant risk.

I would agree about the business model… the long-term competition in the market for brokerage services will probably move towards being like airlines… commodity services and almost commodity products at little or no cost (eg., TSM funds/ETFs and with nominally different indexes and trades subsidized by PFOF) and eventually they will begin to nickel and dime and time us to death with fees (airlines: checked baggage fees, carry-on fees, reservation change fees, etc.) to minimize the nominal price of loss-leader services and cover their overhead of customer support and back-office operations.

[steadyosmosis]

I don't think so.

[Rudedog]

I've followed Schwab closely since my TD Ameritrade account was converted to Chas Schwab. I'm not worried. In fact, my wife and I bought three 18-month CDs from Charles Schwab Bank, paying about 5.35%. However, I wouldn't buy any Charles Schwab common stock.

[nisiprius]

It might matter to Schwab's stockholders. It shouldn't matter to Schwab's customers.

If you're within FDIC limits at Schwab Bank, then you're OK there.

As for the brokerage, brokerages are very safe because they hold virtually 100% of whatever you buy. They keep it separate. It doesn't go anywhere. They are not like a health club, where you are paying today for something they promise to do later. They are not like an airline, where you pay today for a ticket and they promise to fly you somewhere later. And they are not like banks, where they only keep roughly 10% of the money you deposit available for withdrawals, taking a calculated risk that most people will leave their money in the account for a long time and that people won't all want their money all at once.

[nisiprius]

But, yes... this doesn't look great. But it also doesn't look terrible. If I had an account at Schwab Bank, I'd certainly keep it under the FDIC insurance limits, and I might check the ratings from time to time.

Deposit Accounts: Schwab Bank health report

[ebeb]

I personally would not own any common stock in SCHW though. Their business model has been evolved to derive most of their profit from arbitrage of low interest rate deposits in FDIC insured sweep accounts. That model is failing before our eyes. They do have serious problems to address.

I do believe investors money is safe due to regulatory compliance and FDIC, SIPCS, etc., but shareholder equity in Schwab is definitely at significant risk.

Yup I bought SCHW stocks at around $55 and its now $47, trying to get out asap once it recovers a bit. But I am not too worried as they are a behemoth with $7T AUM so wont collapse easily .

[retiringwhen]

Yup I bought SCHW stocks at around $55 and its now $47, trying to get out asap once it recovers a bit. But I am not too worried as they are a behemoth with $7T AUM so wont collapse easily .

SCHW's market cap is only $80B not $7T. Credit Suisse and Silicon Valley Bank were both over $30B just two years ago.

Also, Schwab has most of their AUM in brokerage accounts that do not generate ongoing income streams outside of low interest settlement accounts. They have much less in actual fund management that collects recurring expense fees. I think you vastly over-estimate their heft.

According to data I found for 2022 before much of the current bear market, here are the amounts of assets managed (as in ETF, or mutual fund operated by the fund complex) for the big players that get talked about here:

Blackrock - $9.2T
Vanguard Group - $8.1T
Fidelity Investments - $4.3T
Schwab Asset Management - $0.69T (as in less than $1T)

Schwab has major problems. Buying TD Ameritrade was a doubling down on the brokerage arbitrage game, but it really does not help them in the new world.

According to this site, 55% of all Schwab revenue is from interest on deposits. I have read elsewhere that in previous years Schwab made over 100% of its net profits from the deposit interest. They had been subsidizing the rest of the business by essentially paying zero % interest rates on FDIC insured settlement accounts.

That is really hard to maintain when there are dozens, of easily available options including ETFs like SGOV that will bleed off those non-productive deposits. 5% money market interest rates completely change the game.

Notice, I am not even making the case against SCHW by discussing the bank's potential solvency issues related to losses in long-term bond holdings ala SVB, Republic and Credit Suisse.

[retiringwhen]

There is a lot of froth in the financial services business to blow away and Schwab is surely high on the list. The wind to get the job done is a return to historically normal interest rates after 15 years of artificially low rates.

[NYCaviator]

I don’t think there’s anything to worry about if you stay under FDIC limits, but I wouldn’t be surprised, at all, if we see Schwab looking to decouple its bank at some point. Their business model of making their money off of low interest deposits isn’t working for Schwab right now, and may not work in the long term.

[jeffyscott]

^ I don't understand how "decoupling" the bank would help? That's where they make the majority of their money, so if they don't make money there, what can they substitute as a new revenue source?

If brokerage cash deposits have declined because the interest spread has become too great for enough people to tolerate it with enough of their money, the only "solution" to that would seem to be to pay a higher interest rate. Less revenue would be better than none. I think the spread between the bank interest and treasuries, etc. was obviously much smaller in the recent past.

Thanks to a lawsuit and/or the SEC, their own robo-advisor accounts are paying 4.4% on cash now, if they paid that in all brokerage settlement accounts there'd probably be a lot more cash willing to settle for that rate.
https://www.schwab.com/legal/sip-sweep- ... rest-rates
(They also disclose there that they recently earned about 0.74% more than what they paid out, at the higher robo-advisor cash rate.)

[ebeb]

SCHW's market cap is only $80B not $7T. Credit Suisse and Silicon Valley Bank were both over $30B just two years ago.

SCHW client assets is $7T if you include third-party securities although declined in 2022. https://content.schwab.com/web/retail/p ... counts.pdf

Now unlike other banks Schwab brokerage wont have bank-run so what is the need to sell long term devalued bonds at loss to pay runaway clients. So they just need to sit tight and weather the storm which they will

[retiringwhen]

SCHW's market cap is only $80B not $7T. Credit Suisse and Silicon Valley Bank were both over $30B just two years ago.

SCHW client assets is $7T if you include third-party securities although declined in 2022. https://content.schwab.com/web/retail/p ... counts.pdf

Now unlike other banks Schwab brokerage wont have bank-run so what is the need to sell long term devalued bonds at loss to pay runaway clients. So they just need to sit tight and weather the storm which they will

My point about AUM, is that unlike State Street, Blackrock, Vanguard and Fidelity, Schwab has a tiny asset management business. Asset Management makes customers sticky.

Low interest rate deposits are just the opposite. In fact, Schwab had to settle for significant costs for deceiving customers in the intelligent portfolio business by hiding their fees under low interest rate deposits.

Next, why are you so sure Schwab Bank won't have a run? Almost all their FDIC deposits could be ACH'd out to a different bank or brokerage in 24 hours. BTW, i cannot find how much is actually deposited in Schwab Bank, that seems to be a closely held number. All reports I can find summarize all cash at all institutions including money market funds.

Every modern online bank is just a bunch of customers hitting a dozen button clicks away from insolvency every single day. It requires very little effort. In fact, I would hazard that the velocity of cash moving between institutions is only increasing this year. This is a systemic problem that all banks are facing, and requires some effort to increase customer loyalty and stickiness.

[ebeb]

Next, why are you so sure Schwab Bank won't have a run? Almost all their FDIC deposits could be ACH'd out to a different bank or brokerage in 24 hours. BTW, i cannot find how much is actually deposited in Schwab Bank, that seems to be a closely held number. All reports I can find summarize all cash at all institutions including money market funds.

Their bank deposits seem to be piddly $126B see third line https://content.schwab.com/web/retail/p ... counts.pdf
Also those deposits are probably from Intelligent portfolios which will be sticky and most people dont use Schwab for storing large bank deposits due to horrible interest rates. So bank-run is not a problem here. Also if the bank failed their brokerage wont fail so common stock will retain most of the value

[afan]

I have no idea what a failure of the bank would do to the stock price. The market would react to the bad news and the stock might take a beating, even if the brokerage business remained healthy.

I interpreted the OP to be discussing the safety of assets held at the brokerage or in bank deposits. Neither of those would be at risk if the bank were to fail as long as one stayed below the FDIC limit.

News reports have said that Schwab Bank has a relatively low share of its bank deposits in amounts over FDIC limits. If true, then relatively little of its deposits would be yanked by people afraid of losing the uninsured amounts in the case of a bank failure. That would imply a low risk of failure.

What is surprising is that at least so far Schwab Bank has not been declared too big to fail. It apparently is the 10th largest bank, so I suspect TBTF may be in its future. In theory, that would mean tighter controls on its risk. It seems also to mean that some combination of federal entities will prevent depositors from losing money.

As for the stock price, it is hard to imagine the bank failing without the stock being hammered. But I do not buy individual stocks, so I don't care.

[adave]

Since the bank accounts are linked to a brokerage account also, it’s extremely easy to transfer excess cash to the Schwab brokerage account and put it in a MMF.

I doubt much money is actually leaving the Schwab platform. There is definitely no mass exodus as it is very easy to get a higher rate on cash on their platform.

I’m sure they make some money off their MMFs.

I predict they will be fine.

[retiringwhen]

Since the bank accounts are linked to a brokerage account also, it’s extremely easy to transfer excess cash to the Schwab brokerage account and put it in a MMF.

I doubt much money is actually leaving the Schwab platform. There is definitely no mass exodus as it is very easy to get a higher rate on cash on their platform.

I’m sure they make some money off their MMFs.

I predict they will be fine.

That is all nice and in fact Schwab touted that fact last quarterly report.

The problem is their profits have been largely derived from the Schwab Bank deposits, not holding third party deposits. I think their next quarterly report will not be so rosey for their bottom line. Last quarter got juiced because their spread widened temporarily before depositors wised up!

We are witnessing arbitrage in action, now Schwab has to find a new profit center.

This is one of the reasons I found it ironic that Vanguard opened their FDIC Cash Deposit program last year. It was a tiny move to provide an alternative to Schwab, but they didn't need to do that. The Fed took the punch bowl away before they could even try.

[anoop]

Their brokerage will be fine. Their bank is hard to say unless you know what kind of assets they are holding. For example, if they made a ton of CRE loans depending on how things go that part could be in trouble. Otherwise, the bank part would be similar to any large bank. I wouldn't panic if I was with them.

[adave]

Since the bank accounts are linked to a brokerage account also, it’s extremely easy to transfer excess cash to the Schwab brokerage account and put it in a MMF.

I doubt much money is actually leaving the Schwab platform. There is definitely no mass exodus as it is very easy to get a higher rate on cash on their platform.

I’m sure they make some money off their MMFs.

I predict they will be fine.

That is all nice and in fact Schwab touted that fact last quarterly report.

The problem is their profits have been largely derived from the Schwab Bank deposits, not holding third party deposits. I think their next quarterly report will not be so rosey for their bottom line. Last quarter got juiced because their spread widened temporarily before depositors wised up!

We are witnessing arbitrage in action, now Schwab has to find a new profit center.

This is one of the reasons I found it ironic that Vanguard opened their FDIC Cash Deposit program last year. It was a tiny move to provide an alternative to Schwab, but they didn't need to do that. The Fed took the punch bowl away before they could even try.

Sure, I agree - they will need to adapt the business model. I would not hold the stock personally. But I don't think they are at any risk of collapse.

[jeffyscott]

Since the bank accounts are linked to a brokerage account also, it’s extremely easy to transfer excess cash to the Schwab brokerage account and put it in a MMF.

I doubt much money is actually leaving the Schwab platform. There is definitely no mass exodus as it is very easy to get a higher rate on cash on their platform.

I’m sure they make some money off their MMFs.

I predict they will be fine.

As noted above they earned 0.74% on robo-cash, where they pay 4.4% currently. So their margin on regular brokerage cash, where they are paying 0.45% has to be tremendous. Meanwhile, the ER on their retail MMFs is "only" 0.34% and all that revenue is not profit, unlike the 0.74%.

I don't know how much it matters, but any money that is in Schwab bank CDs is all in brokered CDs. So at least that money can not be moved away, unlike regular direct bank CDs, where people can cash in early and pay a small penalty. All any holder can do is sell the CD to someone else.

[typical.investor]

There is a lot of froth in the financial services business to blow away and Schwab is surely high on the list. The wind to get the job done is a return to historically normal interest rates after 15 years of artificially low rates.

I disagree that Schwab is threatened by the rate cycle.

[Freeadvice]

How does this affect the Schwab money funds? I hold the Schwab Value Advantage Money Fund (SWVXX). Is this FDIC insured? I currently have an amount that’s over twice the FDIC limit.

[aristotelian]

How does this affect the Schwab money funds? I hold the Schwab Value Advantage Money Fund (SWVXX). Is this FDIC insured? I currently have an amount that’s over twice the FDIC limit.

Any threat to Schwab Bank is not relevant to SWVXX which is backed by assets at Schwab brokerage. That being said, money market funds are not FDIC insured and can occasionally "break the buck". A government debt default might trigger such an event, I don't know.

[Freeadvice]

Thank you. My Fidelity advisor says that my FDLXX money market DOES have FDIC coverage up to $250,000 because of the way Fidelity structures it. Could this be true? I never heard of this before.

[Wiggums]

Thank you. My Fidelity advisor says that my FDLXX money market DOES have FDIC coverage up to $250,000 because of the way Fidelity structures it. Could this be true? I never heard of this before.

This is what Fidelity says on their website

“The Fidelity Cash Management Account ("Account") is a brokerage account designed for spending and cash management. Fidelity is not a bank and brokerage accounts are not FDIC-insured, but uninvested cash balances are eligible for FDIC insurance. Balances above $5 million may be placed in a non-FDIC insured money market fund, which earns a different rate.”

Source: https://www.fidelity.com/cash-managemen ... ent%20rate.

[fatgeorge]

Any threat to Schwab Bank is not relevant to SWVXX which is backed by assets at Schwab brokerage. That being said, money market funds are not FDIC insured and can occasionally "break the buck". A government debt default might trigger such an event, I don't know.

What about Schwab mutual funds like SNXFX etc? I assume they are also backed by the underlying securities (i.e. stocks, bonds etc which compose the fund) and the only thing which comes from Schwab here is the formula describing how many of which stocks should be there?

[mark5]

Lol I just bought 112 shares of SCHD

[exodusNH]

Any threat to Schwab Bank is not relevant to SWVXX which is backed by assets at Schwab brokerage. That being said, money market funds are not FDIC insured and can occasionally "break the buck". A government debt default might trigger such an event, I don't know.

What about Schwab mutual funds like SNXFX etc? I assume they are also backed by the underlying securities (i.e. stocks, bonds etc which compose the fund) and the only thing which comes from Schwab here is the formula describing how many of which stocks should be there?

Each mutual fund (and by extension ETF) is its own legal entity ("investment company".) Its assets are not available to Schwab to cover Schwab's debts. Further, the stocks and bonds owned by the mutual fund are held by a separate bank (like JP Morgan or Bank of NY Mellon) in a segregated account.

(Also, Schwab the bank is a separate entity from Schwab the brokerage.)

[aristotelian]

Lol I just bought 112 shares of SCHD

If you are trying to signal belief in Schwab buy SCHW

[NYCaviator]

I'm curious if the recent $2.5b in bonds that Schwab sold shored up its finances or if this is just kicking the can down the road?

I wouldn't be concerned necessarily having assets at Schwab (too big to fail), but obviously a massive brokerage and affiliated bank having financial trouble isn't a good thing.

[alex_686]

Each mutual fund (and by extension ETF) is its own legal entity ("investment company".) Its assets are not available to Schwab to cover Schwab's debts. Further, the stocks and bonds owned by the mutual fund are held by a separate bank (like JP Morgan or Bank of NY Mellon) in a segregated account.

(Also, Schwab the bank is a separate entity from Schwab the brokerage.)

To extend a bit, Schwab is just the manager of the fund.

The fund's assets are held in a segregated account at a 3rd party custodian.

[alex_686]

I'm curious if the recent $2.5b in bonds that Schwab sold shored up its finances or if this is just kicking the can down the road?

I wouldn't be concerned necessarily having assets at Schwab (too big to fail), but obviously a massive brokerage and affiliated bank having financial trouble isn't a good thing.

Do you know who issued the bond? Schwab, Schwab brokerage, or Schwab Bank National Association?

[ebeb]

Do you know who issued the bond? Schwab, Schwab brokerage, or Schwab Bank National Association?

Looks like Schwab Corp. according to www.fitchratings.com Website on May 19th:

Issuer: The Charles Schwab Corporation
Debt Level: senior unsecured
Issue: USD 1.3 bln Variable bond/note 19-May-2034

Issuer: The Charles Schwab Corporation
Debt Level: senior unsecured
Issue: USD 1.2 bln Variable bond/note 19-May-2029