Massive holdings in US banks prompt regulator to investigate BlackRock and Vanguard

Tue Apr 02 2024
Ramesh Sridharan (917 articles)
Massive holdings in US banks prompt regulator to investigate BlackRock and Vanguard

U.S. banking authorities are checking with index-fund behemoths BlackRock, Vanguard, and State Street to see if they are remaining passive in their holdings of U.S. banks.

A large portion of the over $23 trillion under management by the three companies is invested in funds that passively track indices like the S&P 500.

It is commonly believed that an investor has a controlling interest in a lender if they own more than 10% of the shares at multiple banks, which BlackRock and Vanguard have, although State Street also has several large positions. Because banks play a unique function in the economy, regulators are interested in checking their ownership and control.

The largest asset managers are now immune from some strict banking regulations, such as requiring approval to acquire shares above the 10% threshold, so long as the firms do not actively participate in the market. Even if they have the right to vote in shareholder elections, they should not use that power to impose their political beliefs on boards or management.

Members of the Federal Deposit Insurance Corp. are pushing for a potential shift in the current strategy. According to The Wall Street Journal, one board member named Jonathan McKernan has proposed a measure to improve the FDIC’s oversight of the companies and is hoping for a vote on the matter in the next few weeks. While the FDIC looks into the issue, he is requesting an injunction to stop the companies from investing more than 10% in FDIC-regulated banks.

According to sources familiar with the matter, Republican FDIC board member McKernan and Democratic board member Rohit Chopra recently met with representatives from Vanguard and BlackRock to review their assets, showing that the matter has backing from both parties on the five-member board. Other board members and McKernan have had high-level discussions about the issue.

The Big Three are not using their enormous investments to influence FDIC-regulated banks, he continued, and we need to do more to prove it.

Concerns in Washington about the index-fund managers’ sway over corporate America and their ability to vote on crucial issues like climate change and pay equity are reflected in any move to increase oversight of asset managers’ stakes.

Notable events in recent memory include the 2021 split between Exxon Mobil’s management and the three largest index-fund managers, who sided with a small activist shareholder who was unhappy with the oil giant’s fossil-fuel strategy and helped elect dissident directors. The asset managers voiced their displeasure with Exxon’s financial performance, the board’s lack of knowledge in the oil industry, and the board’s impartiality, as reported in the Journal at the time.

According to Republicans, they are worried that financial corporations will use their influence to support leftist causes on behalf of index-fund investors. According to progressive Democrats, a small number of companies have too much influence on the economy.

Legal scholar John Coates of Harvard University claims that the Big Three have almost 20% of the S&P 500 businesses’ voting power. “The Problem of 12,” a book exposing the increasing power of a handful of institutions, was published in 2023. It stated that this represents a larger percentage of U.S. public firms than any three investors have ever owned before.

While BlackRock and Vanguard have agreements to keep a low profile with the banks, Vanguard has a comparable arrangement with the FDIC. Companies often attest to their own compliance by signing self-certification documents.

In a statement, Vanguard stated its intention to engage in productive dialogue with the FDIC and that it will let the underlying companies in the index make management decisions and lawmakers make legislative decisions.

A source close to the matter said that BlackRock officials have privately countered the FDIC’s worries, arguing that the current agreements with the Fed are sufficient and that the FDIC’s oversight does not require any adjustments.

According to Lindsey Keljo of the Securities Industry and Financial Markets Association, a Wall Street trade group that includes BlackRock, there is no need to impose redundant regulations on passive investments in banking organizations until there is substantial evidence that these investments are actually damaging banks and their depositors.

Ramesh Sridharan

Ramesh Sridharan

Ramesh Sridharan is our Stock Market Correspondent covering events and daily movements of stock markets in Asia. He is based in Mumbai