Schwab clients are withdrawing $8.8 billion from the main funds this week

(Bloomberg) – The Charles Schwab Company. It saw $8.8 billion in net outflows from major money market funds this week as investors scrutinized the brokerage firm’s resilience amid questions about the health of the broader financial industry.

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Customers have withdrawn money from two Schwab Value Advantage Money funds, which total $195 billion in assets as of March 15, marking the largest redemptions in at least six months, according to company data compiled by Bloomberg. The data covers the three days through March 15.

According to company data, Schwab’s government and Treasury funds saw inflows on each of the three days, while its main funds were outflows.

Principal funds differ from government money market funds and Treasury funds, which have grown in popularity since the 2008 financial crisis and since the market’s rout at the start of the pandemic in 2020. Principal fund assets fell by $18 billion industry-wide for the week ending March 15 while total equity fund assets rose The money market increased by $ 121 billion, according to data from the Investment Company Institute.

While outflows are a risk, Schwab’s overall franchise is still doing well, according to a Bloomberg Intelligence report. “Schwab’s stronger base of mostly FDIC-insured retail deposits is a major support from contagion outflows,” wrote analysts led by Neil Sipes.

Major fund outflows began after a weekend in which Silicon Valley Bank and Signature Bank failed, and investors rushed to evaluate companies including First Republic Bank and PacWest Bancorp. Schwab’s banking unit suffered $14 billion in unrealized losses in its portfolio of held-to-maturity assets at the end of 2022, prompting company executives to scramble to reassure investors this week that it has enough liquidity to weather market volatility.

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“Although its greater exposure to fixed-rate securities is already similar to SVB’s declining exposure, we see the risk of unrealized losses materializing with mitigation of Fed easing and Schwab’s ability to generate liquidity organically,” according to Bloomberg Intelligence analysts.

Schwab’s money market funds undergo stress tests for its exposure to interest rate changes and have daily and weekly liquidity levels above regulatory requirements, according to Mike Peterson, a company spokesperson. He said the company’s flagship funds have seen significant asset growth over the past year.

“In an environment of rising interest rates, we’ve had clients benefit from higher yields quickly and now with market volatility, as we expect, clients are seeking the relative safety of government funds,” Peterson said in an email. “Within our money market funds, we see a rotation from flagship funds towards government funds, which is typical in this market environment.”

Schwab shares were trading as low as $45 on March 13, the lowest intraday price in more than two years. They are down about 24 percent since March 8, when depositors fled a Silicon Valley bank and questions grew about the broader financial system. The stock fell 2.8 percent to $57.88 in regular New York trading Thursday.

Schwab funds are among the largest primary money funds in the United States, a product that typically invests in securities issued by financial institutions and non-financial companies. Prime funds are a source of capital for many of the world’s largest financial institutions, and Schwab funds hold certificates of deposit from Deutsche Bank AG and Truist Bank as well as commercial paper issued by units of Citigroup Inc. and Bank of America Corp., according to fund documents.

Investors have flocked to government Treasury and money market funds in the past week, pushing pooled money fund assets to a record $5.39 trillion as of March 15, according to Crane Data, an industry watch firm.

“We’re seeing inflows across the board, generally across all of our liquidity products,” Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes Inc., said in an email. “It seems to come from bank deposit products more than anything else.”

(Adds total major fund outflows and adds context in fourth and fifth paragraphs)

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