The recent uncertainty surrounding banks has created increased volatility in global stock markets causing investors to become anxious about their financial assets. Many IFA clients have expressed concern and confusion regarding protections available from the Federal Deposit Insurance Corporation (FDIC) and the Securities Investor Protection Corporation (SIPC). Important information that explains the differences between these two entities and the insurance coverage they provide is available in a recent IFA article located here. Also, the article discusses the protections that are available from the three custodians, Charles Schwab, TD Ameritrade and Fidelity, that IFA utilizes for client assets.

Uneasiness and fear in financial markets often creates a condition where investors view both troubled and well managed companies through the same set of concerned lenses. When a few companies in a sector have issues or cease to exist, a cloud is cast over all firms in that sector.  "Don't throw the baby out with the bathwater" is an old saying that accurately reflects the emotions involved with this type of situation. The current pressures in the global banking sector including the failures of Silicon Valley Bank and Signature Bank have cast just such a storm cloud over all banking institutions. While this emotional response is understandable, it is imperative to remember that not all banks are distressed. Fighting back the temptation to succumb to the emotions of the moment and instead focus on gathering educational information and facts surrounding banking institutions where your financial assets reside will reveal the most prudent path forward.

With the above thoughts in mind and in response to concerns expressed by IFA clients based on recent headlines surrounding Charles Schwab, let's review some important information. First, it is critical to understand that Schwab is a brokerage firm that owns a bank. In fact, they are the largest public broker-dealer in the U.S. Their current total assets under custody are approximately $7 trillion with about 95% of those assets segregated at the broker-dealer for the benefit of clients. These fully paid client securities are segregated from other Schwab assets and held at third party depository institutions and custodians such as the Depository Trust Company (DTC) and the Bank of New York. The SEC Customer Protection Rule prevents Schwab from using client assets to finance their own proprietary businesses. In the unlikely event Schwab should become insolvent, these segregated securities are not available to general creditors and are protected against creditor claims. In dissolution, regulators would step in and assign client accounts containing segregated securities to another solvent broker-dealer. This is what happened when Lehman Brothers filed for bankruptcy in September of 2008. Within a few weeks, SIPC coordinated a process to reassign more than 110,000 customer accounts containing more than $92 billion in segregated assets. For more information on how securities are protected at Schwab please visit schwab.com/legal/account-protection.

The primary purpose of Charles Schwab bank is to provide banking services to its clients on the brokerage side of the business. A large number of clients from the broker dealer have utilized the services of the bank resulting in approximately $367 billion in bank deposits at the end of 2022. This would rank as the nation's 10^th largest bank. This is important information to understand as recent concerning headlines have compared Schwab bank to much smaller regional banking institutions. The concern raised is that Schwab Bank held roughly $28 billion in unrealized paper bond losses at the end of 2022. The unrealized losses are largely a result of investments made by the bank in mortgage-backed securities and U.S. Treasuries when interest rates were lower than current rates. As rates have risen, the value of these bonds on paper has decreased. By pledging to hold on to these bonds until maturity, for accounting purposes, the lower values show up as unrealized losses on their balance sheet. A problem could arise if these investments needed to be sold to meet withdrawal requests from depositors. In recently published remarks from Charles Schwab, the brokerage's founder and co-chairman and Walt Bettinger, co-chairman, and current CEO they stated, "Given our significant access to sources of liquidity, there is a near-zero chance we'd need to sell any of our HTM (held to maturity) portfolio prior to maturity." The complete text of the comments from Messrs. Schwab and Bettinger can be found at https://www.aboutschwab.com/updated-our-most-recent-perspective-on-industry-events. In a recent New York Times article, Michael Wong, director of equity research, financial services, at Morningstar stated that "Schwab shouldn't ever have to change those unrealized losses into realized losses by selling the securities, because it has so much access to cash." He went on to say that the company had access to the Federal Reserve's new emergency lending program, which can provide it with more than $200 billion in cash to deal with potential deposit withdrawals by clients. It also had about $40 billion in cash on its balance sheet at the end of 2022, Mr. Wong added, and more than $50 billion of cash is expected to come in this year, according to his calculations, as well as other sources of liquidity.

Still, some are trying to draw a parallel between what happened at Silicon Valley Bank (SVB) and the current position of Charles Schwab Bank. The first important piece of information is that the depositor base for these 2 institutions is different. SVB had a large concentration of tech startups and venture capitalists. At the time of their collapse, about 97% of their total deposits were in excess of the $250,000 maximum insured by FDIC. Once the tech companies and venture capitalists started withdrawing their deposits, SVB did not have access to enough liquidity to meet the withdrawal demands. In contrast, Schwab's depositor base is primarily retail client oriented and approximately 80% of their deposits fall below the $250,000 FDIC threshold. As previously stated, they have access to significant liquidity sources to address higher than normal withdrawal requests.

Given Schwab's unique structure of a brokerage firm owning a bank, their substantial retail centric asset base, the fact that client securities are segregated and covered by SIPC and excess SIPC insurance, their bank's relatively high ratio of deposits under the FDIC insurance maximum and their significant access to liquidity, IFA continues to have a high level of confidence in the safety of client assets held in custody at Charles Schwab. IFA's executive management team will continue to monitor future developments at Charles Schwab and communicate any change in our opinion to our clients.

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