The Federal Deposit Insurance Corp (FDIC) is considering a plan to ensure asset management giants BlackRock, Vanguard and State Street stick to their passive roles when it comes to investments in US banks, a senior regulatory official told the WSJ on Tuesday.

Jonathan McKernan, a board member of the bank regulator, is championing an order that would direct FDIC staff to regularly examine large asset managers who own a stake of more than 10% in FDIC-regulated banks to ensure they are not improperly influencing their operations.

McKernan said he has developed a plan to enhance the FDIC’s monitoring of the firms and hopes the proposal will receive a vote from the board over the coming weeks.

“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks.”

Jonathan McKernan, FDIC

This issue has bipartisan support among the five-member FDIC board; McKernan, a Republican, and Rohit Chopra, the Democrat who heads up the Consumer Financial Protection Bureau (CFPB) and sits on the FDIC’s board, have jointly held recent meetings with officials from Vanguard and BlackRock to discuss their holdings, people familiar with the discussions said. McKernan has also discussed the matter at a high level with other board members. 

“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” he said. 

Leveraging their influence

BlackRock and Vanguard each hold more than 10% of the shares at many banks, a threshold that normally determines whether an investor is assumed to have a controlling interest in a lender, while State Street also holds a number of sizable stakes.

Right now, regulators in effect exempt the biggest asset managers from a host of onerous banking rules, such as needing permission when they acquire shares above the 10% threshold – as long as the firms remain passive. That means they shouldn’t exert influence on management or boards, including by imposing political views, though they can vote in shareholder elections. 

“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.”

Lindsey Keljo, a managing director of the Wall Street trade group SIFMA

In a January speech, McKernan argued regulators should do more to ensure firms are upholding those commitments. Vanguard and BlackRock have agreements with the Federal Reserve to remain passive with respect to the banks, while Vanguard has a similar one with the FDIC; meaning the banking regulators mainly just rely on firms to self-certify right now.

“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” McKernan said on Tuesday.

Resistance

The financial services industry opposes any proposed regulations that would add more oversight in this manner. Vanguard issued a statement, saying: “Vanguard leaves management decisions to the underlying companies in the index and policy decisions to policymakers,” adding that it looks forward to a “constructive dialogue with the FDIC”.

“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,” Lindsey Keljo, a managing director of the Wall Street trade group SIFMA, said in a statement.

Social initiatives

Republicans say they fear the investment firms leverage their ability to vote on behalf of index-fund investors to promote social initiatives such as climate-change goals. And Democrats fear that just a few outsized firms hold an unduly large amount of sway over the economy. 

Both things seem to be happening.

BlackRock is Exxon Mobil Cop.’s second largest shareholder; in 2021, the asset manager threw its support behind several of upstart hedge fund Engine No. 1’s candidates to join Exxon’s board in a blow to the energy giant, providing a boost to the hedge fund to pressure Exxon to invest more in renewable energy.

Holding smaller stakes at Exxon but still having a strong voice, Vanguard and State Street similarly supported these director candidates, and all three raised concerns about Exxon’s financial performance, lack of energy sector expertise in its boardroom, and the Exxon board’s independence.

BlackRock has also incorporated environmental, social and governance factors into its investing products and services; in countering criticism of this move as overly one-sided, the company cited the billions that it continues to invest in energy companies.

As far as influence is concerned more generally, the big three asset managers control more than 20% of the votes of the companies in the S&P 500, according to Harvard University law professor John Coates. That’s a greater share of US public companies than any three investors have ever previously held, he wrote in a 2023 book, The Problem of 12, about the growing influence of a small number of institutions. 

In terms of US banks more specifically, the big three asset managers are among the top shareholders at some of the biggest ones, including JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup.