At the root of Schwab's income is idle client money. The firm "sweeps" cash deposits from brokerage accounts to its bank, where it can reinvest in higher-yielding products. The difference between what Schwab earns and what it pays out in interest to customers is its net interest income, among the most important metrics for a bank.


After a year of rapidly rising rates, there's greater incentive to avoid being stagnant with cash. While many money-market funds are paying more than 4% interest, Schwab's sweep accounts offer just 0.45%.


"As a result of rapidly increasing short-term interest rates in 2022, the company saw an increase in the pace at which clients moved certain cash balances" into higher-yielding alternatives, Schwab said in its annual report. "As these outflows have continued, they have outpaced excess cash on hand and cash generated by maturities and pay-downs on our investment portfolios."


To plug the gap, the brokerage's banking units borrowed $12.4 billion from the FHLB system through the end of 2022, and had the capacity to borrow $68.6 billion, according to an annual report filed with regulators. Schwab borrowed an additional $13 billion from the FHLB so far this year, the filing showed.

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