According to a senior regulatory official on Tuesday, a top U.S. banking regulator is mulling over a strategy to guarantee that asset management behemoths BlackRock, Vanguard, and State Street maintain their passive positions when it comes to holdings in U.S. banks.👀
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Federal Deposit Insurance Corp. (FDIC) board member Jonathan McKernan is advocating for an order that would require FDIC employees to conduct routine examinations of large asset managers who hold a stake of more than 10% in FDIC-regulated banks to make sure they are not improperly influencing their operations.
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McKernan said he intends to bring up such an order at the FDIC’s April board meeting. A representative for FDIC Chairman Martin Gruenberg directed queries about the incident to McKernan and declined to comment more.
According to a regulatory official familiar with the situation, McKernan and Rohit Chopra, a fellow FDIC board member and director of the Consumer Financial Protection Bureau, have met together with BlackRock and Vanguard to talk about their holdings.
Asset managers now function under what are known as “passivity commitments,” whereby they promise, in exchange for less onerous regulatory oversight than would normally follow a party with a large bank stake, to abstain from certain influential activities in banks in which they hold substantial investments.
McKernan stated in a January speech that since regulators mostly rely on firms to self-certify, they ought to take more steps to make sure businesses are keeping their promises.
The financial sector is against any attempt to increase regulatory supervision.
“We see no reason to institute duplicative regulations on passive investments in banking organizations without far more justification and proof that these investments are in fact harming banks and their depositors,” said Lindsey Keljo, a managing director with the Securities Industry and Financial Markets Association.
It is common for asset managers to face criticism for having undue influence over the management of the companies in their portfolio. Legislators have also charged these companies with putting political agendas ahead of profits. Republicans, for instance, criticized BlackRock for using environmental, social, and governance (ESG) factors in its investment decisions.
Citing the billions of dollars it has invested in energy companies, the company refuted the accusations. The company’s CEO, Larry Fink, stated that he had stopped using the term “ESG” a year ago due to its excessive politicization.
Vanguard said in a statement: “We look forward to continuing our constructive dialogue with the FDIC to answer questions about Vanguard’s proven, long-term investment approach.”
Among the largest shareholders of some of the largest U.S. banks are the big three asset managers: JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.
BlackRock’s stock has increased by roughly 2% so far this year, while State Street’s stock has decreased by 0.3%, underperforming the nearly 10% increase in the benchmark S&P 500 index.
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