This week's story comes from Charles Schwab, one of the biggest financial institutions in the United States with over $7 trillion in customer assets, more than 2 million retirement accounts, and over 33 million brokerage accounts.
The story is similar to that of SVB, and it revolves around a critical issue that's affecting banks and their customers. While money market funds offer around 4% interest rates, banks like Schwab and others pay only 0.4-0.5%, causing customers to withdraw their funds in what's known as a bank run.
The problem for banks like Schwab is that their income is based on borrowing and earning interest on the money their customers deposit in the long run. If customers withdraw their funds, banks may face difficulties in generating revenue, which is why the situation poses a significant challenge.
Moreover, the question on everyone's mind is how long this situation will last, which is the "million-dollar question."
The solution to this problem is to lower interest rates. However, the sticky service inflation makes it impossible for the Fed to do so.
To better understand this, let's take a look at the following graph:
This graph shows two fundamental things: the Fed's funding rate (interest rates) and the inverted version of the difference between the 10-year fixed Treasury bond maturity and the 2-year fixed Treasury bond maturity.
What you need to understand from this graph is that there is a very high correlation between the funding market and the Fed's interest rates. In other words, banks like Schwab rely on the Fed's interest rates to generate revenue, and the correlation between the two is essential.
But why is this the case? The answer lies in the banks themselves.
So, what does the correlation tell us? It seems inevitable that the Fed will have to lower interest rates in the coming months. However, this may not be as simple as it sounds due to sticky service inflation.
In other words, we may be in for a bumpy ride, and it's essential to stay informed and aware of the situation.
To sum up, the banking industry is facing significant challenges, and banks like Schwab must find ways to address them to remain competitive and profitable. While the Fed's interest rates may play a crucial role in generating revenue, banks must explore alternative solutions to ensure they can weather the storm and continue to provide the best services for their customers.