The Federal Deposit Insurance Corp. recently made a push to assert regulatory authority over large asset managers such as Vanguard Group, BlackRock and State Street. Their enormous funds — each has over $1 trillion in their flagship index funds — invest in every single company in the U.S. stock market, and that number includes numerous banks.
The ostensible concern for the FDIC’s interest in pursuing regulatory authority — expressed by FDIC Director Jonathan McKernan and Consumer Financial Protection Bureau Director Rohit Chopra — is the notion these asset managers may not be sticking to their passive roles when it comes to their bank investments.
In late April, each regulator put forward separate proposals to increase FDIC oversight of the large asset managers to ensure that they remain "passive" investors in banks. McKernan proposed setting up an FDIC-run compliance program over asset managers, while Chopra proposed a rule change that would assert FDIC oversight over banks that file a change in control application–even if the Federal Reserve reviewed and approved the change.
While the proposals were quickly shelved, FDIC board members all expressed support for revisiting the issue in the future — perhaps before the 2024 presidential election. That the FDIC still is considering what amounts to an ambitious regulatory power grab should raise alarm for both financial institutions and investors — not to mention taxpayers and the larger economy that relies on a robust free-market system.
The purpose behind these proposals — other than expanding the regulatory authority of the FDIC — remains unclear. The Federal Reserve already regulates large asset managers with significant positions in banks, and it has a comprehensive and transparent framework to determine when a company controls a bank. In addition, Vanguard and BlackRock have agreements with the Federal Reserve to remain passive investors and not seek to exert any authority if they have 10% or more of any class of voting securities of a bank.
The asset managers have made a number of other commitments at the behest of the Fed, such as not taking any action that asserts control over the bank, not having more than one common director or employee with the bank, not selling shares to anyone seeking control over the bank, and not threatening to sell shares to induce the bank to take any actions or non-actions.
In the spirit of nonduplicative and transparent rule-making, the FDIC should point out the specific gaps in regulation by the Federal Reserve that it plans to fill. Even if it can identify regulatory gaps, the Federal Reserve Board would be the appropriate authority to cover those potential blind spots, and it should not be hard for the FDIC to convey its concerns to the Fed.
This focus on increased oversight brings the FDIC’s priorities into question.
While attempting to regulate banks and asset managers, the FDIC neglected its own housekeeping, leading to disarray. A recent Wall Street Journal investigation detailed reports of sexual harassment, discrimination and interpersonal misconduct at the FDIC. Sadly, it wasn’t until Congress started calling for change did Chairman Martin Gruenberg say he was prepared to step down.
Instead of looking to unnecessarily expand its regulatory scope, maybe the FDIC should first take accountability for its own shortcomings.
Additional regulatory costs that solve no well-defined problem would increase the costs of equity financing of banks, which would particularly hurt smaller banks and result in less access to credit for borrowers — particularly small businesses and consumers that rely on bank financing. These increased regulatory costs would also reduce returns for investors who hold bank stocks, many of which are pension funds.
Indraneel Chakraborty is a professor in the finance department at Miami Herbert Business School. He has worked for Citadel Investments and Citigroup Global Markets fixed-income divisions. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I’s editorial team.
