U.S banking crisis: Are brokerages next to fail?
My take on 2 popular brokerages
In March 2023, Silicon Valley Bank (SVB) in the United States collapsed. It was the largest bank by deposits in Silicon Valley, and the 16th largest bank in the U.S.
The troubles of Credit Suisse, Switzerland’s second largest bank, further deepened the banking crisis.
Are brokerages the next in line?
Let’s explore 2 of them.
IBKR
Interactive Brokers is a brokerage firm that provides online trading services for stocks, options, futures, forex, bonds, and funds across multiple global markets.
Solid financial strength
IBKR has more than $11 billion in highly liquid assets, mainly cash in bank and reverse-repos collateralised by US treasury securities.
They are only invested in:
Treasury bills
Treasury notes
Reverse repurchase agreements
No exposure to affected banks
IBKR does not maintain any business relationships with any of the distressed banks like Silicon Valley Bank, First Republic Bank, and Signature Bank.
Margin lending
A big chunk of IBKR’s revenue comes from margin loans from trading, and investing client’s excess cash.
All margin loans that clients maintain with IBKR are fully secured by stock valued at up to 140% of the loan.
IBKR’s prudent margin policies do not allow the borrower to correct a margin deficiency within days, as permitted by regulation.
Marked-to-market portfolio
Asa broker, IBKR is required to mark-to-market its portfolio and report any losses in their FOCUS monthly report to regulators.
Skin-in-the-game
Thomas Peterffy, the chairman and owner of IBKR, owns 75.5% of IBKR.
If the company burns, his pocket burns more.
Saxo
Saxo Capital Markets is a global leader in online trading and investing worldwide with access to forex, CFDs, stocks, ETFs and bond markets.
Solid financial strength
Saxo Group has more than $20 billion in highly liquid assets, including cash, demand deposits and receivables from central banks and financial institutions.
No exposure to affected banks
Saxo Singapore and the entire Saxo Bank Group do not maintain any business relationships with the closed or materially affected banks.
Regulated by MAS
Saxo Capital Markets Pte Limited, a wholly owned subsidiary of Saxo Bank A/S, is regulated by the Monetary Authority of Singapore (MAS) as a capital markets services license holder and an Exempt Financial Advisor.
Prudent management
Saxo has been prudent in approaching their treasury and balance sheet management, maintaining a very low exposure to interest rate movements.
Well-capitalised
The Saxo Bank Group has equity of approximately EUR 1 billion and a high Common Equity Tier 1 ratio of 24% (large international banks typically range from 13–18%). This means that the institution is extremely well-capitalised.
Conclusion
At first glance, these 2 brokerages seem to be well-positioned financially.
However, if you’re someone who’ve got substantial amount of assets in one broker, it’s wise to diversify among a few.
This way, if one goes under, you’ll still be okay.