What happened

Shares of the massive brokerage and multinational financial services firm Charles Schwab (SCHW 0.81%) plummeted by nearly 33% between Feb. 28 and March 31, according to data provided by S&P Global Market Intelligence.

So what

Schwab has been reeling, like many stocks in the banking sector, after three U.S. banks collapsed in March and Credit Suisse was forced into an acquisition by regulators.

The big reason that all of these banks failed is that they had lots of uninsured deposits, experienced massive deposit outflows, and then had to sell large chunks of their underwater bond portfolios that have been crushed by rising interest rates.

Schwab takes most of its deposits and invests them in securities, so it also has a huge amount of unrealized bond losses. At the end of 2022, Schwab had $17.4 billion of tangible common equity and about $15.6 billion of unrealized bond losses that had not yet been factored into its equity calculation. So, if Schwab ever had to sell these bonds while they trade at a loss, the company would be in big trouble.

Still, this is a very unlikely scenario. First of all, more than 80% of the company's deposits are in balances under $250,000 and therefore would be insured by the Federal Deposit Insurance Corporation (FDIC), which limits the possibility of a large-scale bank run. Furthermore, Schwab believes it could handle such an event.

"There would be a sufficient amount of liquidity right there to cover if 100% of our bank's deposits ran off," CEO Walt Bettinger told The Wall Street Journal in an interview published on March 23. "Without having to sell a single security."

Schwab has said it has $100 billion of cash and could access upward of $300 billion of liquidity from sources including the Federal Home Loan Bank and the Federal Reserve's newly created Bank Term Funding Program, which allows banks to pledge certain securities at par for a short-term loan.

Now what

I think Schwab is very unlikely to experience a huge run on deposits requiring it to sell securities while they trade at a loss, which would wipe out a lot of equity. Holding more than $7 trillion of client assets, Schwab is also certainly too big to fail.

That said, having to replace lower-cost deposits with higher-cost funding is likely going to be painful for the company's earnings in the near term. That said, I think the sell-off presents a good opportunity to buy Schwab if you are willing to ride out the volatility and hold for the long term.