Former equity analyst here, but I never covered the banking sector so treat this post like an amateur opinion. I use Schwab as a broker so I took a look at Schwab's financials this weekend.<p>First, Schwab has over $350 billion in deposits. That has declined from over $450 billion at it's peak last year. Unlike the regional banks, I'm guessing that this is less due to capital flight (moving from Schwab to another bank), and more due to customers moving their assets from cash (Schwab pays a pitiful 0.5%), and into higher-yielding assets (like treasuries or money market funds). The assets stay on Schwab, but it still decreases Schwab's deposits and liquidity.<p>Moreover, I was stunned when I saw that Schwab reported over $150 billion in held-to-maturity assets of over 5 year duration (and over $100 billion of that is in bonds of greater than 10 year duration). Again, not a banking analyst (also not sure if some of this is hedged), but this looks very aggressive to me, and could result in a significant $15+ billion loss that significantly impairs tangible book value. Regulators really dropped the ball by not incorporating more stress scenarios based on interest rates.<p>Schwab recently sent a notice that they have a large amount of liquidity, and it is unlikely that they'll need to sell the HTM maturities. Still, there is a concern that Schwab customers will panic and put that to the test. The falling stock price and posts like this will probably raise awareness of Schwab's issues.<p>Personally, I'm pretty disappointed in Schwab, but my opinion is that your brokerage assets are almost certainly safe. Schwab still has a decent cushion (including equity, preferred, and debt), and operates a pretty valuable franchise. Equity holders could be in trouble due to concerns over negative carry though (their long-term HTM assets could yield less than the cost to attract new deposits).<p>Personally, I turned off the margin at Schwab this weekend out of an abundance of caution, to reduce the likelihood that I'll be an unsecured creditor if shit truly hits the fan. However, that will almost certainly not be necessary.
This a small reminder that Schwab has trillions in Assets Under Management. Unlike SVB, they can't skip the regulatory stress test audits like SVB could because they are so large. Unless they are fraudulently presenting false data, I am personally doubtful of that.<p>So, this is literally the market reacting the news of SVB & SBNY going into receivership and taking a dump in the whole financial sector.
Best I can think of is that people are selling anything financial heavily used by Silicon Valley tech companies, after the SVB shareholders were pretty much confirmed to be getting nothing. Schwab is probably the most popular broker for tech RSUs, and so a ton of tech workers have Schwab accounts.<p>Maybe people think that there is a chance tech employees will be withdrawing en masse? That still doesn’t make sense to me, since it’s primarily a brokerage in that industry and the broker relationship is totally different from a bank. They actually have your shares and they can wait a few days for the sale to clear before giving you cash. Maybe lots of people also bank with them out of convenience? Again, doesn’t make sense to me, they are large enough to require stress tests that SVB didn’t take. No rational case makes sense to me yet, so I am betting it’s the simple association as a financial service the tech industry uses.
They have a similar percentage of held to maturity unrealized losses to equity as SVB. So, not good.<p>Charles Schwab $SCHW
4Q22<p>Held-to-maturity unrealized losses $15,580 mln
/ Tangible common equity $17,439 mln
= HTM losses of equity 89%<p>Compared to Silicon Valley Bank $SIVB
4Q22<p>Held-to-maturity unrealized losses $15,160 mln
/ Tangible common equity $11,880 mln
= HTM losses of equity 128%<p>source: <a href="https://twitter.com/hkeskiva/status/1634982958087159809" rel="nofollow">https://twitter.com/hkeskiva/status/1634982958087159809</a>
This argument is interesting, that it's being driven customers leaving banks that aren't adjusting their returns to the new Fed interest rates, but wouldn't Schwab be a beneficiary then?<p><a href="https://twitter.com/biancoresearch/status/1634979304755822594" rel="nofollow">https://twitter.com/biancoresearch/status/163497930475582259...</a><p>> "And, as this chart shows, THIS IS A PROBLEM FOR ALL OF BANKING, not just SVB. All banks, as I noted the retweet below, thought they could offer 0.50% deposit rates (orange) forever and no one would ever move."<p>> "The sleeping giant, the American public, awoke at 5% (blue). Now at cocktail parties instead of regaling their friends about crypto, Ark, or the price of wheat, they are now bragging how they ditch their near 0% yield savings account for a 4.9% Schwab money market account! How smart am I!!"<p>However not all Schwab accounts are at that rate (this seems to come down to FDIC-insured or not), for comparison to Vanguard / Fidelity see (Mar 1 2023):<p><a href="https://www.mymoneyblog.com/charles-schwab-cash-sweep-options.html" rel="nofollow">https://www.mymoneyblog.com/charles-schwab-cash-sweep-option...</a>
My 2 cents:<p>Banks are required by Bale III rules to guarantee the money they lend with a proportional amount in proper assets. Those assets are mostly US treasury bonds (for US banks; EU bonds for EU banks, etc). Treasury bonds from the past few years come with very low interest rates or even zero, or negative ones.<p>As the Fed's rates (and other central bank's rates) have been climbing rapidly in the past few months, new bonds come with quite hefty interest rates. Therefore old bonds with near-zero rates cratered on the second-hand market. And who owns <i>tens of thousands of billion dollars</i> in these bonds? The banks...<p>So each and every bank will try to realise its bonds to pay back the deposits that people hit by SVB's failure are trying to get their hands on, will see its actual value crater, with the compounding effect that an even larger amount of free-falling bonds will flush the second-hand market...<p>So the whole bond market may crater, and all the banks with it, and the whole financial system. Every central banker around the world is currently sweating out a way out of it, if there's any (maybe the cat is out of the bag already). Have a good day :)
One fair argument that is going to squeeze the market a bit is that suddenly a LOT of companies just realized that maybe they shouldn't have all/50%/30%/20% their cash in one account. This is going to cause a short run where money is stuck between banks as it slushes around. Most larger banks will probably see increases in deposits. Smaller, more risky banks will likely see more immediate liquidity issues caused by the run and less deposits to cover the money taken out.
There a bubble bursting right now as people are realizing that the "not yet made it" startups that got founded doing the age of cheap money is probably not going to make it into profitable enterprises in the current climate of increasing inflation and the resulting reduction in spending by almost all types of consumers.<p>This mean that just about any financial organization dependent on the success of the American startup sector for profits is at risk.
You should read their press release from this morning: <a href="https://pressroom.aboutschwab.com/press-releases/press-release/2023/Schwab-Reports-Monthly-Activity-Highlights-e564be671/default.aspx" rel="nofollow">https://pressroom.aboutschwab.com/press-releases/press-relea...</a>
Most of the regional bank stocks have been halted:
<a href="https://twitter.com/BrianRoemmele/status/1635279537885052928" rel="nofollow">https://twitter.com/BrianRoemmele/status/1635279537885052928</a>
Apparently they put a LOT of cash into treasuries when yields were low. They maybe be in the same position as SVB:<p>* bought a bond for $100<p>* now it's only worth $80<p>* so they either hold it for 10 years and get their $100 back or sell now for 80, realise a huge loss and go bankrupt
The issue is that banks are holding lots of long term treasury bonds with low yields that are worth less than they bought them for. If I wanted to sell you something that locked your money in for 10 years and yielded you 2% in 2023 you'd say not unless I get a sweet discount against the interest I could earn, right? Well banks bought like trillions of dollars worth of aforementioned treasuries.
The president of the USA just announced, on live television, "investors will not be protected in the event a bank fails".<p>So the investors are all pulling their money out and putting it elsewhere.