US Bank Regulator Aims to Strengthen Oversight of Asset Managers’ Bank Holdings, Reports Reuters

By Pete Schroeder

WASHINGTON – A U.S. bank regulator is considering a more rigorous framework regarding how major asset managers like BlackRock and Vanguard demonstrate their lack of influence over banks in which they hold substantial stakes.

On Tuesday, the Federal Deposit Insurance Corporation (FDIC) voted to advance a proposal that would allow the agency to impose stricter regulations and oversight on asset managers or other entities that acquire significant shares in banks.

Agency officials also suggested a potential review of current "passivity agreements" with major asset managers, aiming to enhance FDIC oversight regarding these firms’ commitments to refrain from active involvement in bank management.

According to existing laws, third parties acquiring more than a 10% stake in a bank can be classified as having a controlling interest, leading to heightened regulatory scrutiny. However, firms can bypass these restrictions by entering into "passivity agreements," where they assure regulators that they will not influence the bank’s operations.

Under the proposed changes, the FDIC would eliminate an exemption that allows for new large investments in banks to go unreviewed if approved by the Federal Reserve.

"It is highly inappropriate for the FDIC to abdicate the responsibility Congress entrusted to us to safeguard the ownership and control of the banks we supervise," stated Rohit Chopra, director of the Consumer Financial Protection Bureau and an FDIC board member.

FDIC Chairman Martin Gruenberg expressed support for the proposal, which seeks to gather more extensive feedback regarding the role of asset managers holding substantial stakes in financial institutions.

Additionally, FDIC Commissioner Jonathan McKernan proposed an initiative that would have instructed FDIC staff to examine existing passivity agreements with certain large asset managers, ensuring the agency can effectively monitor these firms’ commitments. His plan included establishing new agreements that would eliminate the current self-certification process and require FDIC oversight.

Despite his proposal, McKernan chose not to put it to a vote after Gruenberg indicated that formal board action was unnecessary for such a review. Gruenberg remained open to discussing existing agreements while emphasizing the need to move away from self-certification practices.

When queried, Gruenberg mentioned that the FDIC could soon begin notifying parties about the review of existing agreements.

The FDIC’s initiative comes amid rising concern among policymakers regarding the increasing influence of large asset managers within the banking industry, particularly due to the growth of index investing and its implications for bank management. Chopra noted that BlackRock and Vanguard collectively manage over $17 trillion in assets, with investments large enough to warrant stricter oversight.

Some FDIC officials voiced apprehensions, with Vice Chairman Travis Hill remarking that such measures might curtail investments in banks, potentially harming those institutions.

A representative for BlackRock declined to comment, while Vanguard stated that it seeks to maintain a "constructive dialogue" with regulators about passive investments. The firms did not provide immediate responses regarding the FDIC’s recent actions.

The industry has quickly criticized the proposed scrutiny, labeling it as unwarranted and overly burdensome.

"It is alarming to see that the FDIC is proposing to revise the current framework in the absence of a clearly identified problem," commented Eric Pan, CEO of the Investment Company Institute, which represents asset managers. "We fear that the FDIC is asking the investment funds industry to prove a negative, which could lead to unnecessary limitations, increased regulatory burdens, and higher costs for American investors."