Charles Schwab (Ticker SCHW) stock is down 30% in just 3 days. Investors are clearly spooked. Though most people think of Schwab as a discount broker, Schwab is mostly a bank. Schwab makes its money by taking idle cash inside brokerage accounts and investing it to earn a spread. Schwab primarily invested in US Treasuries and US agency mortgage-backed securities. Like the failed Silicon Valley Bank, Schwab is sitting on billions of dollars of unrecognized losses due to rising interest rates. Hence the investor concern and recent stock decline.
As one of the largest brokerage companies, Schwab holds brokerage and retirement accounts for millions of individual investors. What happens to your cash and investments if Schwab fails? Should you be worried? I am not and I have the vast majority of my wealth inside Schwab brokerage accounts. Let me explain why.
First, let me be clear that I think the risk of Schwab actually failing is very low. (Schwab’s balance sheet and depositor base is much stronger than that of the failed banks). However, let’s explore what happens in the worst-case scenario. If Schwab were to fail, the most likely scenario is for the US government to arrange an orderly sale to another brokerage company. In this case, your brokerage accounts would simply be transferred to the acquiring company and the disruption would be minimal.
What if things are worse? What if no buyer emerges and Schwab must be liquidated? Your investments are likely still safe as brokerage firms are required to keep their customers’ securities and cash segregated from their own. This is to ensure that even if a brokerage company fails, its customers’ assets will be safe. Thus, Schwab holds your cash and investments separate from their own assets and these can simply be returned to you in a liquidation.
SIPC Coverage
What about the very unlikely scenario that Schwab for whatever reason cannot locate your actual shares? This is where the SIPC (Securities Investor Protection Corporation) steps in. The SIPC serves a similar function in protecting brokerage accounts as the FDIC does for bank accounts. It is important to note that the SIPC only protects you against the loss of your shares, not the loss in value of your shares. If you own 100 shares of Apple stock, SPIC will ensure you get your 100 shares back, but does not protect you against a decline in the price of Apple shares.
SIPC coverage limit is up to $500,000 for securities (stocks, bonds, etc.) and $250,000 for cash per “separate capacity”. If you are below these limits, your investments are fully insured and I give you permission to stop reading the rest of this article. Even if you are above these limits, you may have more coverage than you realize. An individual account, a joint account, and an IRA would be considered three separate capacities and would be eligible for a combined $1.5 million in coverage for securities. See SIPC website below for details on types of separate capacities.
https://www.sipc.org/for-investors/investors-with-multiple-accounts
In the example below, John & Mary have $2.5 million across various brokerage and IRA accounts. Because the accounts qualify for various separate capacities, only $200k of the total is uninsured.
| Owner | Type of Account | Account Value | Insured Amount | Uninsured Amount |
| John | Individual Account | $500,000 | $500,000 | $0 |
| Mary | Individual Account | $400,000 | $400,000 | $0 |
| John & Mary | Joint Account | $700,000 | $500,000 | $200,000 |
| John | IRA | $300,000 | $300,000 | $0 |
| Mary | IRA | $300,000 | $300,000 | $0 |
| Mary | Roth IRA | $300,000 | $300,00 | $0 |
| Total | $2,500,000 | $2,300,000 | $200,000 |
So is the $200k uninsured amount at risk? Well, no, I wouldn’t worry about that either. This is because Schwab has purchased additional insurance from Lloyd’s of London for an aggregate coverage of $600 million that will offer extended projection once SIPC limits are exhausted.
And what if this extended insurance is also exhausted? Theoretically investors could face losses, but I think realistically the US government would step in to make investors whole (as they did for depositors at Silicon Valley Bank and Signature Bank). If SVB and Signature Bank are deemed to pose systemic risk to the financial system, you can bet that Charles Schwab is too big to fail. It is worth noting that we are so far down the rabbit hole of extreme probabilities that it is extremely unlikely we would get this far.
So in summary, I wouldn’t lose a minute of sleep over your brokerage accounts at Schwab. With multiple layers of protection and a likely ultimate backstop from the US government, your brokerage accounts are safe.
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