Is Charles Schwab in financial trouble

What Happens If Charles Schwab Goes Bankrupt?


What happens to client stocks, money, portfolio, and account investments if Charles Schwab goes out of business/bankrupt? Is Charles Schwab in financial trouble and could it fail?


Could Schwab Go Out of Business? Key Takeaways


• In the event of a liquidation of Schwab, there would be several safeguards for clients.

• Schwab operates multiple lines of business; a failure of one unit would not necessarily affect another.

• Accounts at Schwab can be purchased by other financial institutions, allowing the accounts to continue without interruption.

Although bankruptcy is very unlikely at Charles Schwab due to the company’s long history of financial strength, if such an event did happen, account holders would have little to worry about due to multiple safeguards in place for them.


Multiple Companies


The Charles Schwab Corporation owns several businesses. One of these is a bank that provides checking and savings accounts. Another is a broker-dealer that offers self-directed trading, while another unit offers portfolio management and investment advice. A failure of one of these operations would not guarantee the bankruptcy of another.


Charles Schwab Insurance


Schwab has insurance policies on the accounts it offers in case anything ever went awry. In the unlikely case of a failure, these insurance providers would intervene and defend account holders.

For bank accounts, there is FDIC insurance. Current FDIC policies provide at least $250,000 of protection per ownership category. This government agency has increased its minimum level of insurance in some situations. If Schwab Bank were to ever go under, depositors would have the full support of the FDIC up to program limits and possibly beyond. Schwab’s FDIC certificate number is 57450.


is charles schwab in financial trouble?


Securities accounts, whether self-directed or investment-advisory, are defended by SIPC, the major protector of America’s securities accounts. SIPC insurance is good up to $500,000 per separate capacity, which is similar to the FDIC’s ownership category. As with FDIC protection, it’s possible to double or triple the maximum level of SIPC insurance by opening multiple account types.

SIPC insurance guarantees the number of shares in an account. It does not protect against market decline. For example, if an account held 200 shares of Microsoft stock, SIPC would guarantee the account 200 shares. It would not guarantee the price of the shares, which could in theory hit $0.00.

One more really important caveat is in order here: SIPC only insures shares of securities. Positions of forex and futures held with Schwab are not protected by SIPC.


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Charles Schwab Additional Insurance


Schwab has an excess SIPC policy that kicks in whenever SIPC coverage is exhausted. This auxiliary policy is another layer of protection for securities investors. It has a maximum payout of $600 million across all Schwab accounts (the broker has about 34 million investment accounts).


what happens if schwab goes out of business


Types of Business Bankruptcy


In the United States, where Schwab is headquartered, there are two types of business bankruptcy. Under a Chapter 7 bankruptcy, the company is fully liquidated and closed. Under Chapter 11, a restructuring occurs that allows the business to continue operating.

Under the latter legal proceeding, Schwab would remain in business with little change for its customers. Under a Chapter 7 bankruptcy, Schwab would be closed and its accounts, which are assets, would be transferred to other financial institutions who want to acquire the assets.

With either a banking or investment bankruptcy, the FDIC or SIPC would be involved in the legal proceeding to ensure customers are protected.


What Happens If Schwab Goes Bankrupt?


In the unlikely event of a full liquidation of Schwab, accounts held with Schwab, whether bank or investment, would be transferred to other financial institutions. Checking and savings accounts would be transferred to another bank that agrees to take them on. Investment accounts likewise will find new homes at existing brokerage firms that acquire these assets.

At least this is the case for accounts below SIPC and FDIC limits. Amounts above those limits are not officially guaranteed, although, as already pointed out, the FDIC has recently backstopped amounts above the official limit.

It is quite common in the investment world for accounts to get transferred from one firm to another for all sorts of reasons, including at the request of the account owner. This transfer of assets is typically very seamless and encounters few problems. For example, when TD Ameritrade was recently purchased by Schwab, all TD Ameritrade accounts were acquired by Schwab and transferred to it with little interruption.

In a restructuring bankruptcy (Chapter 11), Schwab would restructure some of its debts and remain in operation. Because it remains in operation, there is no need for its accounts to be acquired by another firm, although this would remain a possibility.


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Shareholders and Bondholders


The safeguards mentioned above apply to customers and not equity holders or bondholders. In the event of a collapse, different rules apply to security holders. Typically, they have fewer protections, with stockholders having less protection than creditors.


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Updated on 1/16/2024.


About the Author
Chad Morris is a financial writer with more than 20 years experience as both an English teacher and an avid trader. When he isn’t writing expert content for Brokerage-Review.com, Chad can usually be found managing his portfolio or building a new home computer.