Banks vs. Brokerages?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
GiannaLuna
Posts: 106
Joined: Sat Dec 03, 2016 12:33 pm

Banks vs. Brokerages?

Post by GiannaLuna » Tue Mar 24, 2020 6:16 am

An acquaintence mentioned that in order to avoid loss of emergency funds, it's safer to put those funds into the settlement account of a brokerage account vs. a savings account at a bank, since by law, brokerages are not allowed to loan out that money - so banks are riskier than brokerages.

I am still searching to verify this. Does anyone know if this is true? thank you

User avatar
prudent
Moderator
Posts: 7285
Joined: Fri May 20, 2011 2:50 pm

Re: Banks vs. Brokerages?

Post by prudent » Tue Mar 24, 2020 6:24 am

Nothing is safer than an FDIC-insured bank account (or an NCUA-insured account, the equivalent at credit unions). It doesn't matter what brokerages can or can't do with settlement account funds.

AlohaJoe
Posts: 5223
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Banks vs. Brokerages?

Post by AlohaJoe » Tue Mar 24, 2020 6:35 am

Your friend doesn't understand how modern financial systems work and isn't worth listening to on this topic.

No bank "loans out your money". That doesn't even make sense in the modern financial system.

There are a lot of online courses & articles that explain how fractional reserve banking works and the modern banking system works.

Here's a very simple introduction investopedia: https://www.investopedia.com/articles/i ... -loans.asp

alex_686
Posts: 5626
Joined: Mon Feb 09, 2015 2:39 pm

Re: Banks vs. Brokerages?

Post by alex_686 » Tue Mar 24, 2020 6:41 am

GiannaLuna wrote:
Tue Mar 24, 2020 6:16 am
An acquaintence mentioned that in order to avoid loss of emergency funds, it's safer to put those funds into the settlement account of a brokerage account vs. a savings account at a bank, since by law, brokerages are not allowed to loan out that money - so banks are riskier than brokerages.

I am still searching to verify this. Does anyone know if this is true? thank you
Technically true. That said, having worked both in banks and brokerages on this specific issue, both are highly safe and I would be hard pressed to think of a situation where things went south. But watch out, sometimes cash gets swept to a money market mutual fund - which once again is very very safe.

That said, I would keep it with a FDIC insured bank.

alex_686
Posts: 5626
Joined: Mon Feb 09, 2015 2:39 pm

Re: Banks vs. Brokerages?

Post by alex_686 » Tue Mar 24, 2020 6:48 am

AlohaJoe wrote:
Tue Mar 24, 2020 6:35 am
No bank "loans out your money". That doesn't even make sense in the modern financial system.
Banks loan out your money. Look at a bank's balance sheet and you will find demand deposits sitting there as a liability underpinning their structure. If you read your article closely you will see that savings accounts are now a small unimportant piece of the puzzle.

WIAV8TOR
Posts: 67
Joined: Thu Dec 10, 2015 7:26 pm

Re: Banks vs. Brokerages?

Post by WIAV8TOR » Tue Mar 24, 2020 6:49 am

I usually have $5-8k at the local bank. Any interest is about nil. There are times I need a money order, cash a check, get something notarized. Yes I could be totally online, but choose to have some local services.

After that I have my money market acct at Vanguard, linked for easy $$ transfer. I do have two brokerage accounts at Vanguard, one inside an IRA, the other outside.

I couldn’t deal with the Mickey Mouse atmosphere with a bank brokerage service. Some people need their hand held tightly, hence local ‘financial advisors’.

saver007
Posts: 154
Joined: Fri Nov 07, 2014 9:18 pm

Re: Banks vs. Brokerages?

Post by saver007 » Tue Mar 24, 2020 10:12 pm

This is a very good question. Apart from from the protection granted by FDIC or SIPC, I say Brokers are inherently safer institutions because

Brokers are not allowed to invest client money in non government backed securities. Banks can invest client money in riskier asset such as mortgage backed securities that is not government backed.

Banks can lend money without much collateral or lend with collateral that is difficult to value. Although brokers can also lend money, it is limited to margin lending that is collateralized with exchange listed liquid assets.

That being said, Banks are regulated more strictly with more capital requirements because of the risk they are allowed to take with client money.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Banks vs. Brokerages?

Post by Phineas J. Whoopee » Wed Mar 25, 2020 9:20 pm

I'm sorry toward others, but AlohaJoe is correct. The understandable view, understandable because it's so often asserted, that banks take in deposits and then lend them out is not true.

As long as one stays under the FDIC insurance limit, $250,000, little can be safer. One can argue Treasury bills are, but that's about it, and they don't have dollar-for-dollar daily liquidity.

Banks are not acting in the way the film It's a Wonderful Life represents a savings and loan doing. Neither are credit unions.

PJW

User avatar
DukeMeredith
Posts: 8
Joined: Sun Aug 19, 2018 11:03 pm
Location: Dallas, Texas

Re: Banks vs. Brokerages?

Post by DukeMeredith » Wed Mar 25, 2020 10:12 pm

Community banks and other non-systemically important financial institutions absolutely use demand deposits as a primary source of funds to make loans.

Look at any bank call report or SEC periodic filings of any “small” bank with less than $100 billion in total assets.

This may not be the business model of the top 20 banks in the US, but it is certainly true for the vast manjority of the other 5,000 or so depository institutions in the US.

User avatar
Phineas J. Whoopee
Posts: 9473
Joined: Sun Dec 18, 2011 6:18 pm

Re: Banks vs. Brokerages?

Post by Phineas J. Whoopee » Thu Mar 26, 2020 5:19 pm

DukeMeredith wrote:
Wed Mar 25, 2020 10:12 pm
Community banks and other non-systemically important financial institutions absolutely use demand deposits as a primary source of funds to make loans.

Look at any bank call report or SEC periodic filings of any “small” bank with less than $100 billion in total assets.

This may not be the business model of the top 20 banks in the US, but it is certainly true for the vast manjority of the other 5,000 or so depository institutions in the US.
I'm sorry, but when a bank or credit union lends it creates two things simultaneously: a deposit consisting of new money; and a debt of equal amount but opposite in direction. As the borrower pays back principal the newly-created money is destroyed. Writing off bad debt also destroys money.

Depository institutions are usually constrained in how much they can lend by reserve requirements, but in our extraordinary moment that's no longer the case. There's a strong argument to be made that even from some years ago through today capital requirements are a larger constraint on lending.

PJW

SD2SR
Posts: 8
Joined: Thu May 23, 2019 6:25 pm

Re: Banks vs. Brokerages?

Post by SD2SR » Thu Mar 26, 2020 5:41 pm

I think we have to get out of the weeds for a sec and ask--in sincere, good faith--what untold levels of cash are you stashing in a traditional savings account to warrant this kind of worry? As prudent said, the FDIC (or NCUA for credit unions) exist, in part, to insure your deposits and provide them on demand--it's literally in the name. You can always explore cash management options at brokerages like Fidelity that utilize deposit sweep programs in order to increase your aggregate coverage (e.g. up to $1.25MM).

Post Reply