Our perspective regarding the recent developments in the banking sector

Our perspective regarding the recent developments in the banking sector

In light of recent developments concerning the banking sector, we write today to share our perspective on two key topics:

  1. The nature of our clients’ relationship with Charles Schwab Corporation (“Schwab”) and the safety of their assets.
  2. The highly-publicized failure of Silicon Valley Bank (“SVB”) and its implications for the broader financial system.
Our clients have relationships with Schwab via multiple avenues. Below we explain three of the primary ones and discuss critical points pertaining to the safety of your assets.


As you are aware, we utilize Charles Schwab & Co., Inc. as our preferred custodian for client accounts (Charles Schwab & Co., Inc. is Schwab’s broker-dealer subsidiary that offers investment services and products, including Schwab brokerage accounts). In its capacity as the custodian of client assets, Schwab holds client assets in a brokerage account for each client and buys and sells securities when instructed.

As it pertains to the safety of your assets, it’s critical to recognize one key point: your investment assets are yours. Customer securities—such as ETFs, mutual funds, money market funds, stocks and bonds that are fully paid for—are segregated from broker-dealer securities in compliance with the SEC’s Customer Protection Rule. This is a legal requirement for all broker-dealers. In the unlikely event of insolvency of a broker-dealer (e.g., Schwab), these segregated assets are not available to general creditors and are protected against creditors’ claims. There are reporting and auditing requirements in place by government regulators to help ensure all broker-dealers comply with this rule.

Investment Management (e.g., Money Market Funds & ETFs)

Schwab’s investment advisory subsidiary, Charles Schwab Investment Management, Inc., (also known as Schwab Asset Management), provides investment management services and products (e.g., money market funds, ETFs and mutual funds) to investors. Many of our clients hold Schwab-managed money market funds and/or ETFs in their accounts. These assets are covered by the SEC’s Customer Protection Rule in the same way all other non-Schwab managed assets are. Investors in these funds rely on Schwab for investment management services and are not directly exposed to the financial strength of Schwab.


Lastly, Schwab also maintains a banking subsidiary, Charles Schwab Bank, SSB, (“Schwab Bank”) which provides deposit and lending services and products. Our clients hold balances with Schwab Bank as Schwab’s Bank Sweep program is the default cash feature on most brokerage accounts whereby uninvested cash balances are automatically invested in a Schwab Bank account. This is the only avenue through which our clients are directly exposed to the financial strength of Schwab.

While we are confident in the ongoing financial health of Schwab and its long-term strength and stability, it’s also important to recognize that client assets at Schwab-affiliated banks are protected by the FDIC. The Federal Deposit Insurance Corporation (FDIC) is an independent agency that is backed by the full faith and credit of the United States government. Its purpose is to protect depositors’ funds placed in banks. The standard FDIC insurance amount is $250,000 per depositor, per insured bank.

As you have likely read in the headlines Silicon Valley Bank (SVB) was closed Friday by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. Over the weekend, U.S. regulators subsequently announced that they would guarantee all deposits of SVB, both insured and uninsured, that they would use emergency-lending authorities to make more funds available to meet demands for bank withdrawals across the banking system. Both moves were designed to shore up wavering confidence in the banking system.

The failure of SVB is the second-biggest bank failure in US history trailing only the failure of Washington Mutual in 2008. The bank was the 16th largest in the US with $209 billion in assets as of the end of 2022, according the to the Federal Reserve. Total deposits stood at $175 billion, with $152 billion of those uninsured.

In light of the market reaction and general concerns about the health of the banking sector, we wanted to share two observations:

We believe SVB’s failure is likely to be a relatively unique situation that isn’t indicative of the health of the broader banking industry.

SVB was a tech-focused bank focused primarily on providing banking services to start ups and the funds that invest in them (i.e., venture capital and growth equity funds). The bank experienced rapid growth in recent years alongside the tech industry and deposits nearly doubled in 2021. In turn, SVB loaned these balances to other customers, and invested these balances in securities (e.g., U.S. Treasurys) to generate yield.

Under normal market conditions, deposits are relatively sticky and the returns from loans and marketable securities portfolio are relatively predictable. In the past year, however, there has been stress on the deposit side as investments into the tech sector slowed considerably at the same time as tech companies and VC funds have been burning cash at an elevated pace. That left the outflows from SVB much higher than the bank expected.

In order to meet the demand for withdrawals of these deposits, SVB had to sell assets from its securities portfolio. These assets had declined in value due to the rise in interest rates and were valued at less than they were purchased for. The bank was thus forced to sell these securities at a loss and the bank attempted to raise capital which clearly raised additional concerns amid investors and depositors. This led to a cascading effect of confidence and deposit withdrawals thus setting the stage for the bank’s ultimate demise.

We don’t believe this is a precursor to a wider issue in the banking sector.

Specialized banking industry fund managers and analysts we follow have pointed out that while other banks across the industry have unrealized losses in their securities portfolio due to rising interest rates, the vast majority are viewed as safe from the kind of losses that would leave them insufficiently capitalized, even if they were realized.

Critically, these unrealized losses don’t need to be realized unless a bank is faced with significant depositor withdrawals. The chance of this occurring at large, systemically important banks is greatly reduced given their much more diversified depositor bases and significantly lower percentage of deposits in excess of the FDIC insurance threshold. Analysts currently view the risk as primarily residing outside of the major banks (i.e., a limited number or smaller and mid-sized banks with deposit and/or loan books concentrated in stressed sectors or geographies).

Further, we believe that the emergency measures announced by regulators over the weekend that they would be guaranteeing all deposits of SVB and that they would use emergency-lending authorities to make more funds available to meet demands for bank withdrawals should be sufficient to stave off a potential widespread depositor panic.

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