On the surface, Charles Schwab Corp. being swept up in the worst U.S. banking crisis since 2008 makes little sense. Yet the questions around Westlake-based...
, adding that the firm could borrow from the Federal Home Loan Bank and issue certificates of deposit to address any funding shortfall.
Schwab is unusual among peers. It operates one of the largest U.S. banks, grafted onto the biggest publicly traded brokerage. Both divisions are sensitive to interest-rate fluctuations. It shifted $189 billion of agency mortgage-backed securities from “available-for-sale” to “held-to-maturity” on its balance sheet last year, a move that effectively shields those unrealized losses from impacting stockholder equity.
At the root of Schwab’s income is idle client money. The firm “sweeps” cash deposits from brokerage accounts to its bank, where it can reinvest in higher-yielding products. The difference between what Schwab earns and what it pays out in interest to customers is its net interest income, among the most important metrics for a bank.“Schwab’s counting on inertia,” said Allan Roth, founder of Wealth Logic, a financial planning firm.
“As a result of rapidly increasing short-term interest rates in 2022, the company saw an increase in the pace at which clients moved certain cash balances” into higher-yielding alternatives, Schwab said in its annual report. “As these outflows have continued, they have outpaced excess cash on hand and cash generated by maturities and pay-downs on our investment portfolios.”
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