Schwab Clients Pull $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’s resilience amid questions about the health of the wider financial industry.

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Clients pulled money from two Schwab Value Advantage Money funds, which had a combined $195 billion of assets as of March 15, representing the largest redemptions in at least six months, according to company data compiled by Bloomberg. The data cover the three days through March 15.

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

Prime funds differ from government and Treasury money market funds, which have grown in popularity since the financial crisis of 2008 and since the market rout at the onset of the pandemic in 2020. Prime fund assets decreased by $18 billion industrywide for the week ending March 15, while total money market fund assets increased 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 a key support from contagion outflows,” wrote analysts led by Neil Sipes.

The prime fund outflows started after a weekend in which Silicon Valley Bank and Signature Bank failed, and investors scrambled to assess firms including First Republic Bank and PacWest Bancorp. Schwab’s banking unit had $14 billion in unrealized losses in its portfolio of held-to-maturity assets at the end of 2022, leading company executives to seek to reassure investors this week that it has sufficient liquidity to overcome market volatility.

“Though its larger exposure to fixed-rate securities does resemble that of fallen SVB, we see the risk of unrealized losses materializing as tempered by Fed relief 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 last year, he said.

“In a rising interest rate environment, we had clients taking advantage of fast-rising yields and now with market volatility, as we would expect, clients are seeking the relative safety of government funds,” Peterson said in an email. “Within our money market funds, we do see a rotation from prime funds toward government 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 are down about 24% since March 8, when depositors fled Silicon Valley Bank and questions mounted about the wider financial system. The stock fell 2.8% to $57.88 in regular New York trading Thursday.

The Schwab funds are among the largest prime money funds in the US, 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 fund documents.

Investors have rushed into Treasury and government money market funds in the last week, pushing combined money fund assets to a record $5.39 trillion as of March 15, according to Crane Data, a firm that specializes in monitoring the industry.

“We are experiencing inflows across the board, generally into 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 be coming from bank deposit products more than anything else.”

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