Banking regulators are examining whether index fund giants BlackRock, Vanguard and State Street are taking passive roles when it comes to their investments in US banks. The three firms together manage more than $23 trillion in assets, much of which is in funds that passively track indexes like the S&P 500.
BlackRock and Vanguard each own more than 10% of shares in many banks, a threshold that typically determines whether an investor is presumed to have a controlling interest in a financial institution, while State Street also owns a number of significant stakes. Regulators have an interest in overseeing who owns and controls banks because of their special role in the economy as intermediaries of liquidity for monetary authorities.
Currently, regulators exempt the largest asset managers from a number of onerous banking stock rules, such as the need to obtain permission when acquiring above the 10% threshold, as long as the firms remain passive. That means they must not influence management or boards of directors, including imposing political views, although they can vote in shareholder elections.
The current approach could soon change, driven by members of the Federal Deposit Insurance Corporation (FDIC). A board member, Jonathan McKernan, told The Wall Street Journal that he has developed a plan to improve the FDIC’s monitoring of the firms and expects him to receive a board vote in the coming weeks. He is pushing for an order suspending firms’ investments in FDIC-regulated banks above the 10% threshold while the agency examines the matter.
In a sign that the issue has bipartisan support among the five-member FDIC board, both McKernan, a Republican, and Rohit Chopra, a Democrat, have held recent joint meetings with Vanguard and BlackRock officials to discuss their involvements. . and the role they play with them, according to sources familiar with the discussions cited by Bloomberg.
McKernan has also discussed the matter at a high level with other board members. “We need to do more to confirm that the Big Three are not leveraging their large holdings to exert influence over FDIC-regulated banks,” she said.
Any move to more closely oversee asset managers’ holdings would reflect broader concerns in Washington about the power and influence of index fund managers over corporate America and their ability to cast decisive votes that determine who sits on the board. . from A company to climate change and pay equity.
The Exxon Mobil precedent
In a notable recent episode, the big three index fund managers broke with the management of oil company Exxon Mobil in 2021 and supported the election of dissident directors backed by a small activist shareholder concerned, among other things, with the company’s fossil fuel strategy. the oil company. Asset managers raised concerns about Exxon’s financial performance and the lack of energy sector experience on its board, and questioned the board’s independence.
Republicans say they fear that investment firms will take advantage of their ability to vote on behalf of index fund investors to promote liberal priorities. Progressive Democrats say just a few firms have an unduly large amount of influence over the economy.
They control 20% of the S&P 500
The ‘Big Three’ control more than 20% of the company votes in the S&P 500, according to Harvard University law professor John Coates. That’s a larger stake in American public companies than any other group of three investors has previously had, he wrote in a 2023 book, “The Trouble with 12,” about the growing influence of a small number of institutions.
Vanguard and BlackRock have agreements with the Federal Reserve to remain passive to banks, while Vanguard has a similar one with the FDIC. Companies typically self-certify that they are in compliance. “Vanguard leaves management decisions to the companies underlying the index and policy decisions to policymakers,” the firm said in a statement, adding that it looks forward to a “constructive dialogue with the FDIC.”
BlackRock officials have privately expressed their objections to the FDIC’s concerns, saying that existing arrangements with the Federal Reserve are working and that no changes to FDIC oversight are needed, according to a person familiar with the discussions.
“We see no reason to institute duplicative regulations on passive investments in banking organizations without much stronger justification and evidence that these investments are in fact harming banks and their depositors,” said Lindsey Keljo of the A.A. Securities and Financial Markets, a Wall Street association that includes BlackRock among its members.
