Schwab’s loan boom opened a funding gap that it filled with much more expensive money

Charles Schwab’s third-quarter accounts reveal a material shift in how the group is financing its expanding loan book. Receivables from brokerage clients—primarily margin loans—reached $128.1 billion at September 30, 2026, 37 per cent above the level one year earlier. Bank loans reached $72.3 billion, 35 per cent higher year on year. Over the same period, bank sweep deposits and payables to brokerage clients increased by a combined $20 billion, or 6 per cent.[1]

Schwab states the consequence directly: loan growth outpaced the growth of those client-cash sources, and the company increased its use of “higher-cost funding sources” to meet demand.[1]

The scale of the substitution becomes clearer in the average-balance table. During the third quarter, average payables to brokers, dealers and clearing organisations were $42.1 billion, up from $19.1 billion in the equivalent 2025 quarter—an increase of approximately 120 per cent. Average other short-term borrowings were $14.3 billion, up from $7.6 billion, an increase of approximately 89 per cent. Those sources carried average rates of 3.50 per cent and 4.06 per cent respectively. By contrast, average bank deposits cost 0.23 per cent and payables to brokerage clients cost 0.22 per cent.[1]

That is not evidence of a liquidity crisis or an inability to fund the balance sheet. Schwab describes a deliberate response to strong client borrowing demand and reports diversified sources of funding. It is, however, evidence that the marginal dollar supporting loan growth became substantially more expensive than the client cash that traditionally anchors the group’s interest-earning balance sheet.[1]

The distinction matters because Schwab’s reported net interest performance can improve while the funding mix underneath it becomes less favourable. In the third quarter, net interest revenue rose to $3.48 billion from $3.05 billion and the net interest margin increased to 3.04 per cent from 2.88 per cent. The growth in loans and other earning assets outweighed the higher funding burden. The filing nevertheless warns that reliance on higher-cost sources can reduce both net interest margin and net interest revenue.[1]

The approximate shortfall is larger than one headline comparison suggests

Using Schwab’s rounded growth rates, the margin-loan balance one year earlier was approximately $93.5 billion. The move to $128.1 billion therefore represents an estimated increase of about $34.6 billion. Comparing that with the reported $20 billion increase in bank sweep deposits and brokerage-client payables leaves an approximate $14.6 billion difference.[1]

That difference is not an accounting “funding gap” that can be traced dollar for dollar. The $20 billion combines two client-cash categories; the loan figure is a point-in-time balance; cash and loans can move at different dates; and Schwab has many other assets, liabilities and sources of liquidity. The company was also growing bank loans, not just margin loans. The calculation is useful only as a scale comparison: margin receivables alone expanded by roughly $15 billion more than the combined year-on-year growth in the two client-cash categories highlighted by Schwab.[1]

Including bank lending makes the broad imbalance larger. The reported 35 per cent year-on-year increase to $72.3 billion implies an approximate prior-year bank-loan balance of $53.6 billion and approximate growth of $18.7 billion. Margin and bank loans together therefore grew by roughly $53 billion on the basis of the rounded percentages, compared with $20 billion of growth in bank sweep deposits and brokerage-client payables. That broader estimate is necessarily approximate, but it aligns with management’s own statement that lending demand outpaced client-cash growth.[1]

The balance-sheet response is visible in average wholesale-type funding. The combined average balance of payables to brokers, dealers and clearing organisations plus other short-term borrowings was approximately $56.5 billion in the third quarter, compared with $26.7 billion a year earlier. The increase—about $29.7 billion—was nearly 150 per cent of the reported $20 billion year-on-year increase in the two client-cash categories. The periods and definitions differ, so this is not a reconciliation. It shows that the higher-cost categories were no longer peripheral: they had become a major component of the funding base supporting interest-earning assets.[1]

A large price difference between funding sources

The rate differential is economically significant.[1]

Schwab’s average bank deposits cost 0.23 per cent in the third quarter. Average payables to brokerage clients cost 0.22 per cent. The 3.50 per cent rate on payables to brokers, dealers and clearing organisations was about 3.27 percentage points above the bank-deposit rate. Other short-term borrowings cost 4.06 per cent, approximately 3.83 percentage points more than bank deposits.[1]

A simple sensitivity illustrates the order of magnitude without claiming to reproduce Schwab’s accounting. Applying the 3.27-point differential to the $42.1 billion average broker-and-clearing payable balance would produce roughly $1.38 billion of annualised incremental interest expense compared with funding the same notional amount at 0.23 per cent. Applying the 3.83-point differential to $14.3 billion of other short-term borrowings would produce roughly $550 million. Together, the mechanical comparison approaches $1.9 billion a year.[1]

That is not an estimate of avoidable cost. Schwab could not necessarily replace those liabilities with bank deposits; the categories may serve different operational purposes; rates and balances change; and the company’s actual alternatives include secured borrowing, long-term debt, asset sales and changes in the size of the balance sheet. The calculation instead demonstrates why the composition of funding matters even when the group’s blended funding cost appears stable.[1]

Schwab’s table reported an average rate of 0.86 per cent on total funding sources in both the third quarters of 2026 and 2025. That stability could obscure the internal movement. Cheap bank deposits and brokerage-client cash remained enormous—approximately $351.2 billion on average combined—but the mix included much larger balances in categories costing several percentage points more. The growth in earning assets, the repricing of assets and lower rates on some deposits helped absorb that shift.[1]

Why client cash did not keep pace

Schwab describes third-quarter client cash activity as normal, reflecting asset gathering and allocation decisions. Client assets reached $13.33 trillion, while client cash represented 8.9 per cent of assets, down from 9.4 per cent a year earlier. Customers can move cash from low-yielding balance-sheet sweep arrangements into money-market funds, fixed-income products and other off-balance-sheet investments. Those reallocations can retain the customer relationship and assets at Schwab while removing funding from the company’s balance sheet.[1]

This creates an important distinction between franchise growth and balance-sheet funding growth. Schwab can gather substantial net new assets, add brokerage accounts and grow advisory assets without receiving an equal amount of low-cost cash that can finance loans. At the same time, customers may demand more margin credit, pledged-asset lines and mortgages. The balance sheet must bridge the two behaviours.[1]

The filing says Schwab’s dynamic interest-rate modelling assumes runoff of bank deposits and brokerage-client payables is supplemented with wholesale borrowing when needed to fund assets. Beginning in the second quarter of 2026, the company increasingly used that dynamic model as a primary framework for managing interest-rate risk.[1]

That methodological change is revealing. It treats the replacement of client cash with wholesale borrowing not as an exceptional event but as a behaviour that belongs in the core interest-rate and liquidity model. The group’s risk is therefore not limited to whether rates rise or fall on a fixed balance sheet. It also includes whether clients move cash, whether loans continue to grow and what price Schwab must pay to replace the funding.[1]

The model is profitable, but the marginal economics are changing

Schwab’s lending expansion has so far generated strong revenue. Average brokerage receivables in the third quarter were $123.1 billion, up from $87.3 billion. Their average yield was 5.70 per cent, down from 6.52 per cent as market rates changed, but the larger balance increased quarterly interest revenue to $1.79 billion from $1.45 billion. Average bank loans rose to $69.5 billion from $51.8 billion and produced $775 million of interest revenue, up from $557 million.[1]

Those asset yields remain above the rates on the higher-cost funding categories. The spread, however, is much narrower than it would be against 0.22 or 0.23 per cent client cash. A margin asset yielding 5.70 per cent has a gross spread of approximately 5.48 points over brokerage-client payables but only 1.64 points over other short-term borrowing at 4.06 per cent, before operating costs, capital, hedging, credit and liquidity expenses.[1]

The analysis should not assume that individual asset pools are matched against specific liability pools. Schwab manages the balance sheet in aggregate, and payables to brokers and clearing organisations may be associated with securities financing and settlement activity rather than a simple unsecured loan. But aggregate economics still apply: when more of the balance sheet is funded at several per cent rather than a fraction of one per cent, loan growth must work harder to produce the same net-interest return.[1]

This is a different investigation from the question of which customer strategies generated the margin-loan increase. The central finding here is not that long-short or other strategies grew. It is that the lending franchise grew faster than the cheapest associated funding, forcing a large expansion in substantially more expensive liabilities.[1]

The balance-sheet evidence does not show funding stress

The same records contain important evidence against an alarmist interpretation. Schwab ended the quarter with $520.7 billion of total assets, reported strong profitability and retained access to multiple secured and unsecured funding channels. Its net interest margin expanded rather than contracted year on year. The company also reported that pledged asset lines were substantially collateralised by securities with fair values above the related borrowings, while its bank-loan allowance remained small relative to the portfolio.[1]

Those facts do not make the funding mix irrelevant. They establish that the issue is the price and resilience of growth, not a demonstrated inability to meet obligations. A well-capitalised financial group can rationally choose wholesale funding when the expected return on loans exceeds the cost and when retaining client relationships has strategic value. The decision may be accretive even though it is less profitable than funding the same asset with low-cost client cash.[1]

There are also plausible reasons for the sharp rise in broker-and-clearing payables that do not amount to conventional borrowing for customer loans. Settlement timing, securities lending, short-credit balances and clearing activity can alter the category. Schwab’s footnote says that, beginning in the fourth quarter of 2025, certain margin loans and short credits related to client long-short strategies were moved out of the standard interest-earning-asset and funding-source lines into “other” interest revenue and expense. That reclassification complicates direct comparison between periods and is another reason not to label the entire $42.1 billion balance as a simple loan-funding facility.[1]

But the reclassification does not negate the company’s narrative. Schwab separately says lending growth was supported in part by wholesale funding and that it increased higher-cost sources because loan demand outpaced client cash. The cautious conclusion is therefore based on management’s stated causal account, reinforced by the movement in average balances and rates, rather than on an assumption that every payable served the same purpose.[1]

A national retail-investing issue, not only a bank-spread issue

Schwab had more than 40 million active brokerage accounts at quarter-end. The funding decision therefore sits behind one of the largest retail-investing franchises in the United States. Customers experience it through the rates paid on uninvested cash, the availability and pricing of margin credit, the yields offered on alternative cash products and the firm’s incentives when directing balances between on- and off-balance-sheet destinations.[1]

This does not mean Schwab’s customers are being charged for wholesale funding through a direct surcharge. Margin rates are set under published schedules and negotiated arrangements, and product pricing responds to competition and risk. It does mean the group has a commercial reason to preserve low-cost balance-sheet cash as lending demand expands. Clear disclosure of that incentive is material to understanding cash-sweep debates, margin pricing and the economics of brokerage accounts advertised around low or zero commissions.[1]

For regulators, the relevant monitoring question is whether funding can remain reliable under correlated stress: falling collateral values, increased margin utilisation, client cash outflows and higher wholesale spreads. For investors, it is whether loan growth continues to add net interest income after the marginal funding cost and capital requirement. For customers, it is whether cash rates and product-routing choices remain transparent when low-cost balances become more valuable to the broker.[1]

What would allow a full assessment

Schwab’s public reporting provides enough data to identify the shift but not to allocate it precisely.[1]

A fuller disclosure would separate the funding used for margin loans, pledged-asset lines and mortgages; distinguish secured securities-financing payables from other broker-and-clearing balances; report committed and uncommitted portions of short-term borrowing; and show the average cost of incremental rather than total funding. It would also quantify how much of the loan growth was supported by balance-sheet cash migrated from external deposit arrangements, retained earnings, wholesale borrowing and other sources.[1]

Investors also need to know how sensitive the model is to simultaneous events. A decline in asset prices can reduce collateral values and generate margin calls. The same market stress can lead customers to hold more cash, which may improve funding, or to withdraw cash, which may worsen it. Falling rates can lower asset yields faster than deposit costs, while rising rates can encourage cash sorting into off-balance-sheet products. Schwab models these behaviours, but the public sensitivity table necessarily compresses them into scenarios.[1]

The immediate evidence is more concrete. Average broker-and-clearing payables more than doubled, other short-term borrowings rose almost 90 per cent, and both cost multiple percentage points more than the company’s largest client-related funding categories. Schwab’s own filing attributes increased higher-cost funding to loan growth that outpaced client cash.[1]

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