FDIC Plan to Review Vanguard, BlackRock Bank Stakes Draws Fire

The Federal Deposit Insurance Corp. lacks the authority for its plan to review large stakes investment companies such as Vanguard Group Inc. and BlackRock Inc. hold in banks, industry groups and state banking regulators say.

The FDIC in July issued a proposal that would require investors seeking to purchase at least 10% of a federally insured bank’s stock to provide advance notice to the regulator. The FDIC would review a potential purchase even if the Federal Reserve had already approved it.

But the agency may not have the power to finalize its rule, the US Chamber of Commerce said in a letter ahead of an Oct. 18 comment deadline.

The Change in Bank Control Act, the 1978 law whose operating rules the FDIC is attempting to overhaul, calls for the Fed to review all transactions that would see an investor take a stake of 10% or more in a bank. The FDIC is seeking to usurp that power without providing any evidence that the Fed has failed to adequately oversee such purchases, the Chamber said.

“There does not appear to be any current evidence to support that assertion,” the letter said.

Even if there were, the FDIC should instead work with the Fed to remedy any shortcomings rather than develop a whole new regulatory regime that would overhaul the review process, the Chamber said.

Investor Sway

The FDIC’s proposal, backed by all three Democratic board members, comes amid concerns from FDIC officials and financial stability proponents that investments from big asset managers are pushing banks to pursue riskier strategies to please investors.

Republican board members—who didn’t vote for the current proposal but had submitted their own that didn’t receive a vote—have raised concerns that investors could push banks to shun industries such as oil and gas producers.

Some investment companies may be violating agreements to remain as passive investors, board members of both parties have said.

The FDIC in August sent letters to BlackRock and Vanguard seeking proof that they’re acting as passive investors.

“The FDIC is prudent to guard against possible attempts by so-called passive investors to seek control of banks, regardless of whether these index funds individually or in concert seek to influence management,” the National Community Reinvestment Coalition said in a comment letter. “Even a firm with a 20 percent stake acting individually can have an outsize influence, particularly when the votes of bank boards are close.”

The increase in bank investments from asset managers and exchange-traded funds adds potential complications to bank resolution plans, particularly for larger institutions, and poses risks to the FDIC’s Deposit Insurance Fund, Better Markets, a financial regulatory advocacy group, said in a comment letter.

The FDIC should strengthen its proposal by declaring it will take part in reviews related to large state-chartered banks “because these institutions have material significance to the resolution resources of the FDIC and management of the DIF,” Better Markets said.

Agency Coordination

The FDIC’s proposal could make it harder for banks, especially smaller lenders, to get the funding they need by adding an extra layer of review for investors, the Index Industry Association, a trade group representing financial index providers, said in a letter.

“The impact of requiring fund complexes to file CBCA notices could materially affect the strategy of the funds within the fund complex, as the potential delay in processing the CBCA filing by the FDIC alongside a notice to the Federal Reserve Board could result in material implications,” the IIA said in its letter.

A common theme from all commenters was that the FDIC shouldn’t go it alone in its work to review large asset managers’ investments in banks.

But opponents of the proposal said the FDIC should focus on fixing the existing process rather than developing a new one.

“Any subsequent CBCA rulemaking should only be pursued on an interagency basis, and it should seek to harmonize the federal banking agencies’ views on matters of control, influence, and their respective approaches to passivity commitments,” the Conference of State Bank Supervisors said in a comment letter.