Fears About Schwab are Overblown

The failure of Silicon Valley Bank (SVB) led to a broader concern over the stability of the financial sector. That has led to fears about client assets held at Charles Schwab, but those concerns are overblown.

As the head of financial and economic research at Buckingham Strategic Wealth, I've been getting lots of questions from clients concerned about the financial risks of having their assets custodied at Charles Schwab. The concerns arose because of the collapse of SVB and were likely elevated by a Bloomberg article that raised concerns about Schwab’s financial safety: Its holdings of longer-term Treasury securities have fallen in value, creating unrealized losses that reached almost $29 billion by the end of 2022. That compares to its current market capitalization of about $97 billion and book equity of about $27 billion.

To address the concerns, my colleague, Jake Fechter, director of compliance for Buckingham Strategic Wealth, explained how we manage the risk of assets at custodians and what level of protection investors have. It is hard to ignore the recent flurry of large bank failures. The downfall of SVB was the first domino in what has become one of the largest bank collapses in U.S. history. Recent attention has now turned to a Senate hearing where regulators are under intense scrutiny to determine how this type of failure happened and how to prevent it in the future.

A large spotlight has been put on Schwab, which has a unique position in all this turmoil. In a recent perspective shared with its clients, Charles Schwab’s founder and CEO stated that the company is “a different kind of financial firm, which can make us harder to understand.” It is the largest public broker-dealer in the U.S. and has expanded its financial services offerings to millions of clients. Part of that expansion is in banking, where it helps serve the needs of its financial services clients. While 90% of SVB’s deposits were uninsured, only 20% of Schwab are. Thus, there is significantly less liquidity risk for Schwab.

As the worlds of broker-dealers and banks collide, the regulatory framework becomes blurry. To help ease some of the confusion, here is an overview of some of the safeguards and protections for clients who custody their assets with Schwab. Multiple layers of protection safeguard investor assets at Schwab and all of the larger custodians and brokerage firms: (1) Brokerage firms must meet minimum net capital requirements to reduce the likelihood of insolvency; (2) Brokerage firms must keep customer securities and cash segregated from their own securities and cash (SEC Rule 15c3-3); and (3) Brokerage firms are required to be members of the Securities Investor Protection Corporation (SIPC), which insures customer securities accounts up to $500,000. Custodians also maintain a number of additional protections, including excess insurance coverage.