Schwab clients withdraw $8.8 billion from Prime funds this week

(Bloomberg) — Charles Schwab Corp . saw $8.8 billion in net outflows from its prime 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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Clients withdrew money from two Schwab Value Advantage Money funds, which had total assets of $195 billion per share. March 15, representing the biggest redemptions in at least six months, according to company data compiled by Bloomberg. The data covers the three days up to March 15.

Schwab’s own government and treasury funds had inflows in each of the three days, while its primary funds had outflows, according to company data.

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

While outflows are a risk, the overall Schwab franchise remains healthy, according to a Bloomberg Intelligence report. “Schwab’s stronger base of mostly FDIC-insured retail deposits is an important support from outflow contagion,” wrote analysts led by Neil Sipes.

The prime fund outflow started after a weekend in which Silicon Valley Bank and Signature Bank failed and investors scrambled to value companies including First Republic Bank and PacWest Bancorp. Schwab’s banking unit had $14 billion in unrealized losses in its portfolio of held-to-expiration assets by the end of 2022, prompting company executives to try to reassure investors this week that they have enough liquidity to weather market volatility .

“While its greater exposure to fixed income is reminiscent of the decline SVB, we see the risk of unrealized losses materializing as mitigated by Fed easing and Schwab’s ability to generate liquidity organically,” according to Bloomberg Intelligence analysts.

Schwab’s money market funds are stress-tested for their exposure to interest rate changes and have daily and weekly liquidity levels above regulatory requirements, according to Mike Peterson, a company spokesman. The company’s prime funds have seen significant growth in assets over the past year, he said.

“In a rising interest rate environment, we had clients taking advantage of rapidly rising interest rates, and now with market volatility as we would expect, clients are seeking the relative safety of public funds,” Peterson said in an email. “Within our money market funds, we are seeing a rotation from prime funds to sovereign funds, which is typical in this market environment.”

Schwab’s shares traded as low as $45 on March 13, their lowest intraday price in more than two years. They have fallen about 24% since March 8, when depositors fled Silicon Valley Bank and questions arose about the broader financial system. The stock fell 2.8% to $57.88 in regular trading in New York on Thursday.

The Schwab funds are among the largest prime 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 the Schwab funds held 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 foundation documents.

Investors have rushed into sovereign and sovereign money market funds in the past week, pushing total money fund assets to a record $5.39 trillion per week. March 15, according to Crane Data, a firm that specializes in monitoring the industry.

“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 prime fund outflows and adds context in fourth and fifth paragraphs)

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