Regulator probes BlackRock and Vanguard over huge stakes in US banks

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, (File Photo: Reuters)
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, (File Photo: Reuters)

Summary

The FDIC examines whether investment firms stick to passive-investing mandate.

WASHINGTON—Banking regulators are scrutinizing whether index-fund giants BlackRock, Vanguard and State Street are sticking to passive roles when it comes to their investments in U.S. banks.

The three firms manage more than $23 trillion in total, with much of it in funds that passively mimic indexes such as the S&P 500.

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. Regulators have an interest in policing who owns and controls banks because of their special role in the economy.

At present, 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.

The existing approach could soon change, spurred by members of the Federal Deposit Insurance Corp. One board member, Jonathan McKernan, told The Wall Street Journal he has developed a plan to enhance the FDIC’s monitoring of the firms and hopes it will receive a vote from the board over the coming weeks. He is pressing for an order to pause the firms’ investments in FDIC-regulated banks above the 10% threshold while the agency examines the matter.

In a sign the issue has bipartisan support among the five-member FDIC board, both McKernan, a Republican, and Rohit Chopra, a Democrat, have jointly held recent meetings with officials from Vanguard and BlackRock to discuss their holdings, according to people familiar with the discussions. 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.

Any shift to oversee asset-managers’ stakes more tightly would reflect broader concerns in Washington about the power and influence of the index-fund-managers over corporate America and their ability to cast pivotal votes that determine everything from who sits on a company board to climate change to pay equity.

In one notable recent episode, all three of the big index-fund managers broke with the management of Exxon Mobil in 2021 and supported the election of dissident directors backed by a small activist shareholder concerned with, among other things, the oil giant’s fossil-fuel strategy. The asset managers raised concerns about Exxon’s financial performance and a lack of energy sector expertise in its boardroom, and questioned the board’s independence, the Journal reported at the time.

Republicans say they fear the investment firms leverage their ability to vote on behalf of index-fund investors to promote liberal priorities. Progressive Democrats say just a few firms hold an unduly large amount of sway over the economy.

The Big Three 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 U.S. 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.

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. The companies generally self-certify that they are in compliance.

“Vanguard leaves management decisions to the underlying companies in the index and policy decisions to policymakers," the firm said in a statement, adding that it looks forward to “constructive dialogue with the FDIC."

Officials from BlackRock have privately pushed back on the FDIC’s concerns, saying existing arrangements with the Fed are working and no changes are needed to the FDIC’s oversight, according to a person familiar with the discussions.

“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," said Lindsey Keljo of the Securities Industry and Financial Markets Association, a Wall Street trade group that includes BlackRock among its members.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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