Ask HN: What is going on with Charles Schwab? Stock drop near 40% post SVB chaos
Hi,
Charles Schwab does not have too much of a deposit exposure, however it is going down exactly like SVB and First Capital. Any explanations?
Charles Schwab does not have too much of a deposit exposure, however it is going down exactly like SVB and First Capital. Any explanations?
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.
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.
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.
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).
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.
Also decreases Schwab’s ability to earn profit. They used to be able to give you 0.5% and take it to the market for more. If that source of profit evaporates, that hits their corporate equity.
As long as they have enough equity to burn through, they’ll be okay for customers. Businesses become less profitable all the time, but remain going concerns. But if expenses exceed revenue for the foreseeable future…
Thanks and great post!
Again, this is almost certainly not relevant, but it was a pretty simple action for me to do and quelled my paranoia.
So, this is literally the market reacting the news of SVB & SBNY going into receivership and taking a dump in the whole financial sector.
I think you meant Charles Schwab there, Mr GPT.
The regulations that required that cash had been, in the past, seen as a detriment to the banks and people argued that the regionals would be strangled if they had the same requirements.
Right now specifically, it's not great to be really large but not a money center bank.
And even if Schwab had svb symptoms, the Fed facility announced yesterday fixes it. That program gives loans of up to a year with collateral priced at face value, not market value.
There is zero risk of Schwab running out of cash to cover deposits.
...I'm not sure how much of that is new information though. So while bankruptcy is not likely, a depressed stock price may still make sense.
E.g. I have hundreds of thousands of dollars in stocks in my brokerage account, but $100 in uninvested « float ».
They could invest that $100 to make some money for themselves, but that’s where they might be taking some risk. If they screw it up and don’t have my $100 available, they can’t go fractional on my stocks to make up for it.
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.
Charles Schwab $SCHW 4Q22
Held-to-maturity unrealized losses $15,580 mln / Tangible common equity $17,439 mln = HTM losses of equity 89%
Compared to Silicon Valley Bank $SIVB 4Q22
Held-to-maturity unrealized losses $15,160 mln / Tangible common equity $11,880 mln = HTM losses of equity 128%
source: https://twitter.com/hkeskiva/status/1634982958087159809
There's no liquidity risk anymore. This is just overreaction
This kinda happens with fuel cost hedging in aviation: if your airline locks itself into a high rate and prices drop, your competition buying at spot is going to offer better fares and you’ll bleed customers.
And vice-versa when you lock yourself into a price that becomes below-market: you’ll be able to offer better fares and gain customers.
Then comes down to whether you have enough equity to bleed (or hood enough marketing) to weather the storm created.
There's no harm in holding these assets to maturity. They're fine assets, they're just not paying as much interest as ones you can get today. But buying and holding them will result in a profit, eventually, barring some calamity
More Fed manipulation, if necessary, obviously.
https://twitter.com/biancoresearch/status/163497930475582259...
> "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."
> "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!!"
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):
https://www.mymoneyblog.com/charles-schwab-cash-sweep-option...
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.
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 tens of thousands of billion dollars in these bonds? The banks...
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...
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 :)
The question is where they’re investing the float.
Investments of float accounts for a big proportion of brokerage profits (along with payment for order flow):
> 57% of Schwab’s revenues are from net interest. The firm could literally give away every other service; discount the mutual fund fees to zero, do away with commissions, etc etc, and they would still be profitable.
> Schwab isn’t even the leader among discount brokerages in dependence on net interest. That would be E*TRADE, at about 67% of revenues. Interactive Brokers makes 49% and TD Ameritrade 51% in the segment.
https://www.kalzumeus.com/2019/6/26/how-brokerages-make-mone...
Stock trading commissions in USA for a while have basically been a scam and it’s only because Robinhood came along that that source of revenue is gone to $0. That might result in more risk-taking on the float side.
The cash in your brokerage account would be covered by sipc, not fdic.
Sipc does have its limits for what it guarantees, I guess anything over that would be based on recoveries in the event of a default:
https://www.firstrepublic.com/insights-education/sipc-vs-fdi...
Schwab is not going under. Feds would never allow it. This is an overreaction, and honestly I'd start thinking about buying Schwab stock
If I’m a smaller client/business that regularly has $400k in my Bank of America account, I might now split it between BoA and a new account at a small bank down the street just to keep under $250k at all times.
Keeping bajillions over fdic limits was always a risky affair. Not sure how many smaller banks actually have/had volumes of accounts like that but I could see SVB being an exception.
SVB being an exception is absolutely true though.
This mean that just about any financial organization dependent on the success of the American startup sector for profits is at risk.
The world changed dramatically over the last few years and that's going to hit some sectors harder then others and the sectors that's hurting the most is finance and tech so the companies that have huge exposure to both and not a lot of assets in energy, food and infrastructure is probably going to see losses in the years to come.
You're fine. Everyone is fine.
Any bank with svb like symptoms is now immune from failure. The only thing that should bring a bank down now is outright fraud or horrific asset allocation, meaning specifically assets the feds refuse to lend against.
So if Schwab was buying Indonesian subprime MBS, sure, there's a problem. But they almost certainly were just doing what every other bank does, which means they qualify for the Fed lending facility
That's all you need to hear right there.
They have a _ton_ of liquidity (~$100 billion) so "hold to maturity" unrealized losses aren't going to have to be realized - they can just hold them to maturity.
Also, they claim all their fundamentals are strong and improving with booming deposits, strong margins, etc.
What's more, 80% of their deposit base is fully covered by FDIC insurance.
* bought a bond for $100
* now it's only worth $80
* 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
It's not a bet that interest will stay low as much as I bet that they as a company will be around in 10 years to see the returns. It's a guaranteed profit if they make it to the finish line.
Managing to hang on until maturity doesn't magically make it turn into a profit, when you consider the time value of money. The bonds are worth so little today precisely because they're only returning the original amount at maturity, plus 200 year low interest.
Also, stupidity and laziness.
If I made more money last year than this year. I can still put the older higher salary on this credit application, right?
Also, the interest rate on those loans is quite high, higher than the fed rate. So it might buy you time, but you're basically commiting fraud by doing it...
SVB is already done. They obviously don't qualify. All functioning banks do.
> Also, the interest rate on those loans is quite high, higher than the fed rate.
By .1%
> So it might buy you time, but you're basically commiting fraud by doing it...
It's not fraud. The Fed literally made this investment vehicle to bail out banks.
They literally own a bank. Are you sure about this perspective?
There have been discussions for the last decade that finance institutions have been looking the other way on smaller firm practices as it lets them make more money. If the risks taken are greater than 10 years long, then everyone has gotten paid out by the time there is a problem.
So the investors are all pulling their money out and putting it elsewhere.
Depositors = people who have deposits sitting in the bank.
Though of another way: If you bought SVB on Robinhood then that stock isn't worth anything anymore. If you have money _in_ SVB then it will be available.
Would it be worth anything after SVB is bought by a larger bank, or does the takeover process zero out shareholders?
Biden isn't providing new information, he's simply scoring political points because it would look terrible if the government was backstopping investors.
Investors are never protected when the things they invest in fail. At least, they aren't protected beyond the seniority rules of bankruptcy law.
Seems fair to me, government never bail me out when I do a bad investment.