Banking Focus From the Past Week
For the past week, we have seen increased concern over the health of the banking sector with the Federal Reserve stepping in to provide measures to support bank liquidity needs. For some, this felt a bit like the Global Financial Crisis from 15 years ago as the 16th largest U.S. bank (Silicon Valley Bank) failed in a matter of days. Not only did the share price of Silicon Valley Bank (SVB) crash, but many other financial institutions saw their share price tumble along with the broad market. One of the financial institutions that saw a significant pullback was Charles Schwab. Since we use them as our custodian, I’m sure many of you are asking questions about the safety of your own accounts with Schwab. Hopefully, we can touch upon what happened since last week, and why we have full confidence in Charles Schwab as the custodian for your accounts.
SVB’s failure feels like the first major, direct impact of higher interest rates brought on by the Fed. Silicon Valley Bank did a poor job of managing their interest rate risk, by putting their short-term customers’ deposits into long-term Treasury Notes. This is a far cry from what happened during the Global Financial Crisis in 2007. While the market continues to see risk out there, especially in the financial sector, this feels much different than before. Banks have taken on much less risk and are more highly regulated now compared to the years leading into the financial crisis.
The good news is (whether you agree with it or not), the Fed stepped in and, along with the FDIC, guaranteed all depositors that they will indeed get their money back. It’s not a classic bailout, although it feels that way. The Federal Reserve also stepped in this week and created the Bank Term Funding Program. You can read more here, but essentially it gives liquidity to any other bank that faces this issue.
Given SVB’s unique set of clients and business model, why was a company like Charles Schwab impacted in the news? And since we use them as our custodian, you may be wondering how safe your accounts are. Let’s try to answer both below.
Schwab’s share price is down because they have some of the same exposure risks on their banking side, but at a much lower level. The share price fear has more to do with their margins and lower future earnings, not so much with insolvency. Their client base is much more diverse, and they made an effort to raise cash through most of last year. Yes, there is share price concern, but the safety of the institution is intact. As we write this, Schwab’s share price is already up 20% from its lows earlier in the week. This tells us that it is less of an insolvency issue, and many investors see it as a buying opportunity.
In addition, your accounts at Charles Schwab reside on the custodian platform, not its banking side. The protection and function of a custodian is much different than a regional banking institution like SVB. The banking side and custodial side of Schwab operate as two separate pieces of their business, so God forbid if anything were to happen to the banking side of Schwab and they couldn’t cover their bank deposits, the investments you have within your investment accounts continue to stay intact.
For assets custodied in an investment account at Schwab, the SEC’s Customer Protection Rule has safeguards that prevent firms from using customer assets from their own propriety businesses. It’s a violation of SEC rules for a brokerage firm to merge customer assets with their own. At a traditional bank, the business model is to use customer assets (deposits) in their own line of work. Within your investment account at Schwab, your securities are segregated so that they are not available to the firm.
We’ve heard from some of you this past week, but I’m sure many more are feeling concerned given all that has transpired. While financial concerns and recession come to mind, we’ve also seen a major change in expectations of what the Fed will do with interest rates. The market has been up and down, but has seen some stability and optimism that there could be a Fed pivot sooner than later. We continue to monitor the portfolio and will make changes if we feel it’s necessary. Many of our moves since the fall of last year have been done with volatility in mind and we feel very comfortable with our overall mix of portfolio assets.
The last week is a good reminder to make sure you are comfortable with your own personal banking situation. If you have bank accounts over the FDIC limits ($250,000 for single accounts, and $500,000 for jointly owned accounts), it may be worth considering moving some funds to another institution, especially if you are working with a small or regional bank. Most of the current impact seems to reside in smaller institutions versus larger national banks.
We continue to have full faith and confidence in Charles Schwab as a custodian for our clients, as well as our own money. All of our advisors and employees keep their personal investment accounts at Schwab just like our clients. We’ve used Schwab as the custodian for our firm for over 30 years because of their commitment to their clients, as well as the overall conservative nature of the company.
Should you have any further questions or concerns given all that has happened, please do not hesitate to reach out to us. Your trust in Bouchey Financial Group means the world to us and your confidence in how we operate our business on your behalf is not taken lightly. We’re happy to discuss this further so that you have the financial peace of mind you deserve.
We’ve shared some links below if you’d like to read or watch more about the position Schwab is in from this past week.
All the best,
Steve, Ryan, Marty & John
Walt Bettinger Interview: https://www.aboutschwab.com/walt-bettinger-on-financial-stability
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