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Are Your Assets Safe? Custodial Banks versus Commercial Banks

We've recently received a number of inquiries asking about if client investments are safe with Charles Schwab. The short answer is: Yes.

After fielding many of these questions, we thought it would be beneficial to write an article that unpacks a key distinction between Charles Schwab's custodial bank and Silicon Valley Bank's commercial bank.

In This Insight

  • Key differences between Commercial & Custodial Banking.

  • How is Charles Schwab business structured?

  • Letter from Charles Schwab Founder & Chairmen.

Commercial versus Custodial Banking

The banking industry is a complex and diverse sector that serves as the lifeblood of any economy. It comprises various types of financial institutions, each with its own unique characteristics and roles. Two such institutions are commercial banks and custodial banks. Both play crucial parts in the financial ecosystem, but they differ significantly in their functions and services.

Primary Functions

Commercial Banks

Commercial banks primarily focus on offering a range of financial services to individual consumers, businesses, and organizations. These services include checking and savings accounts, loans, mortgages, credit cards, and other financial products. The main objective of commercial banks is to facilitate everyday financial transactions, provide credit to borrowers, and act as financial intermediaries between depositors and borrowers. When people thinking of "banking", they think of commercial banks. Silicon Valley was a commercial bank.

Custodial Banks

Custodial banks, on the other hand, specialize in safeguarding and managing the financial assets of investors, including individuals (known as retail investors), pension funds, mutual funds, and corporations. Their primary responsibility is to ensure the safekeeping of their clients' assets, including securities, cash, and other investments. In addition to custody services, custodial banks also offer various other asset management services, including trading, trade settlement, performance measurement, and regulatory compliance. Our client assets are held at a custodial bank.

Revenue Models

Commercial Banks

Commercial banks earn their revenue through various channels, including interest on loans and mortgages, fees for financial services, and interest from investing customer deposits in financial markets. They typically operate on a spread-based model, where the difference between the interest rates charged on loans and the interest rates paid on deposits generates income. This revenue model means that commercial banks are in the business of making loans, and those loans have to perform well to earn income.

To make this work, commercial banks run on a fractional reserve banking model, where only a small fraction of client deposits are actually held at the bank. The majority are loaned out for things like mortgages. This means that only a small amount of deposits at a commercial bank are technically held at the bank.

Silicon Valley Bank took consumer deposits and made long-duration loans that declined in value when interest rates went up. When depositors asked for their money back, the bank was forced to sell these long duration loans to return depositors cash, forcing large losses.

Custodial Banks

Custodial banks primarily generate revenue through asset servicing fees, which are charged based on the value of the assets under custody or administration. Other sources of income include transaction fees, such as those for settling trades, and fees for additional services, such as foreign exchange and securities lending. Unlike commercial banks, custodial banks do not rely heavily on interest-based income and do not make traditional loans with your assets.

A critical distinction between these two models is that your investments held at a custodial bank are at the custodial bank. They are not loaned out to others through a fractional reserve banking model.

Regulation and Risk Management

Commercial Banks

Commercial banks are subject to strict regulatory oversight due to their central role in the economy and the potential systemic risks they pose. Regulatory authorities closely monitor their capital adequacy, liquidity, and risk management practices to ensure financial stability. Moreover, commercial banks face credit risk, operational risk, and market risk in their day-to-day operations. One of the key metrics for a commercial bank is the Tier 1 Capital ratio, which is a measure of a bank's financial strength, and it represents the bank's core capital relative to its total risk-weighted assets.

Tier 1 capital is the bank's highest quality capital, consisting of equity capital and disclosed reserves. A higher Tier 1 capital ratio is generally seen as a sign of a bank's financial strength and ability to absorb losses, which can lead to greater confidence among investors, depositors, and regulators. It is important to note, that the Tier 1 capital ratio may range from 6% to as high as 15%, but it still is only a fraction of the total assets at a commercial bank.

Custodial Banks

Custodial banks also operate under a robust regulatory framework, as they are responsible for safeguarding clients' assets. While their focus on custody services means they are less exposed to credit and market risks compared to commercial banks, they still face operational risks and regulatory compliance risks. As a result, custodial banks must maintain strict internal controls, risk management practices, and cybersecurity measures to protect their clients' assets and information. However, because they generally hold all client assets in client accounts at any given time, it would be analogous to having a Tier 1 capital ratio of 100%.

How Charles Schwab is Structured

Charles Schwab is a unique business in that it operates both a commercial bank and a custodial bank. The commercial bank represents 5% of all assets at Charles Schwab and the custodial bank represents 95% of all assets. The commercial bank exists to help add traditional banking services, such as credit cards, mortgages, and deposits for investors that invest with Charles Schwab.

The custodial bank is the lion's share of Charles Schwab business representing 95% of all assets and this is where our client assets are held. The investments held in client accounts are not loaned out in the traditional fashion of a commercial bank, meaning they are safe and can be withdrawn at any time.

Letter from Charles Schwab Founder & Chairmen

Charles Schwab's founder & Co-Chairman, Charles Schwab, wrote an excellent article about this that can be found here.


Commercial banks and custodial banks, while both critical components of the financial ecosystem, serve distinct roles and cater to different client segments. Commercial banks focus on providing a wide array of financial services to individual consumers and businesses, while custodial banks specialize in safeguarding and managing the assets of institutional clients. Each type of bank operates under unique regulatory frameworks, revenue models, and risk profiles. By understanding the key differences between commercial and custodial banks, individuals and institutions can better navigate the complex world of finance and make informed decisions about the financial services that best align with their needs and goals.


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