You may have heard on Friday or over the weekend that a very large bank in California went belly up. Silicon Valley Bank was a very popular bank with emerging companies and venture capitalists. Details are still emerging about how the bank was mismanaged, but liquidity dried up when the bank said they needed to raise additional capital. By the end of the day, $42 billion had been withdrawn. As you know, banks don’t keep that much cash on hand. They use depositors’ cash for loans and then have limited liquidity otherwise. This “tier one” liquidity requirement by bank regulators is only about 4% of deposits. So large withdrawals can put a lot of pressure on the system.

Charles Schwab stock was also weak, but Schwab still maintains almost 2x the liquidity required by regulators. We are monitoring the situation, but are currently not concerned.

It is important to remember that Segment mostly uses Schwab’s custody services, not so much their banking services.

For a little backstory on how your cash is protected, we use Schwab money funds more than we use Schwab bank deposits. A money fund is actually a security that Schwab also custodies. The various money funds we use pay about four times what the Schwab Bank deposit program pays. Segment employees devote a significant amount of time daily to making sure that client Schwab Bank balances are kept to a minimum. We manually purchase money funds for our clients because the yields are so much higher, and we believe the security is higher as well. The FDIC also insures Schwab Bank balances.

The underlying securities inside a money fund are short-term treasury bonds or premium commercial paper. The fact that owning a money fund is actually a security, not cash, gives near unlimited protection for large cash balances. You’re not really subject to Schwab as a counter party in that type of arrangement. Schwab is merely a conduit to a set of underlying securities.

Since Schwab’s revenue and profits are reliant upon advisors and customers who don’t closely monitor their cash and what it pays, this newfound scrutiny will likely put profit pressure on all brokerages. We sold our JP Morgan shares to pull in our horns a bit. Segment clients currently keep about $100 million in the Schwab money funds. This series of a half dozen versions of a money fund pays about three points more than the Schwab Bank. This means our efforts to pare cash and tweak client fund balances to match their daily liquidity needs result in client interest earnings that are about $ 3 million higher than if we allowed the auto bank sweep to kick in naturally. Schwab’s internal systems default to selecting the bank as the storage option for your cash. We generally opt out of this on behalf of clients by manually purchasing money funds.

Over the weekend, Treasury Secretary Yellen said that Silicon Valley Bank depositors of all sizes would have access to their money this week. How she manages to do that without sticking it to the taxpayer, as she claims, remains to be seen.

I hope this gives you comfort and gives you a little better idea how the system works. If you have any questions, please give us a ring.

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