Magazine article American Banker

Limits on Schwab Take Pressure off Fund -- for Now

Magazine article American Banker

Limits on Schwab Take Pressure off Fund -- for Now

Article excerpt

The Office of the Comptroller of the Currency's approval last week of a national bank charter for Charles Schwab Corp. provided insight into the start-up's strategy -- and size.

Some observers expected the San Francisco-based brokerage to rekindle the deposit insurance reform debate, because it has $160 billion in money-market savings accounts or other liquid investments that would be easy to move to insured accounts. With the Bank Insurance Fund's ratio of reserves to insured deposits hovering at its statutory minimum, new deposits threaten to trigger across-the-board premiums.

Banks that have paid for deposit insurance -- at the expense of earnings -- chafe at the idea that the trigger might be pulled by what historically have been nonbanks.

Schwab will probably get lumped with Merrill Lynch & Co., Citigroup Inc.'s Salomon Smith Barney, and others into the debate over so-called free riders, but regulatory documents suggest it may be less of a short-term threat to the bank fund than first thought.

In its preliminary approval on Feb. 4, the OCC specified that Charles Schwab Bank's minimum capitalization would be $275 million and required that it maintain a tangible capital ratio of at least 8% for the first three years. Given these constraints, the bank would be limited to about $3.4 billion of assets -- which represents a substantive limit on deposits.

Net deposits must increase by about $28 billion to lower the fund's reserve ratio by 1 basis point, and it would take about 10 times Schwab's current proposed capitalization to support that many deposits.

"I think that it starts to become a political issue when deposits reach $10 billion to $20 billion," said Bert Ely, an independent consultant.

Merrill Lynch offered a more vivid illustration of the effect of deposit inflows when it began funneling dollars from brokerage accounts into insured deposits in 2000. …

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