Asset Managers and Publicly Traded Banks
The Influence of the Big Three
Asset managers, particularly the Big Three — Vanguard, BlackRock, and State Street — have come under scrutiny for their potential influence on publicly traded banks. FDIC Director Jonathan McKernan expressed his concerns about the growing influence of these asset managers, especially in relation to their index funds.
While the Big Three claim to be passive investors, evidence suggests that their influence is not always as passive as they declare. With their index funds’ popularity, each of these asset managers holds significant equity stakes in various publicly traded banking organizations. Some economists at Harvard and Boston University even speculate that their combined voting power could reach up to 40 percent.
The concept of control plays a crucial role in banking laws. If a company is found to have direct or indirect control over a bank, it becomes subject to specific regulatory requirements. McKernan revealed that the Big Three are highly focused on avoiding a finding of control. The FDIC has provided regulatory comfort regarding their current equity interests in banks, but recent proposals from the asset managers to increase their stakes could potentially surpass the thresholds contemplated by this comfort.
Some asset managers have even considered seeking the right to appoint directors to the boards of these banking organizations. Recognizing this growing concern, McKernan stated that the FDIC should take a closer look at the Big Three and evaluate the activities of their investment stewardship teams and interactions with management of publicly traded banking organizations.
Long Wait Times for Bank Merger Applications
A Slow Approval Process
McKernan also addressed the issue of long wait times for bank merger applications. He informed the audience at the Association of American Law Schools’ annual meeting that certain applications have been with the FDIC for over a year.
Expressing his surprise at the lengthy processing times, McKernan emphasized the need for a revised policy framework to expedite the approval process. Banks that have had to extend their merger agreements undoubtedly understand the urgency for timely consideration of applications. The FDIC should prioritize the revision of policies surrounding new applications to ensure a more efficient process and better serve the public.
Bank Failures and Future Preparations
Learning from the Past
Reflecting on the turmoil experienced in March, McKernan highlighted the importance of preventing future bailouts. He emphasized that considerable work is still required to avoid repeating the cycle of privatizing gains and socializing losses.
To achieve this, regulators need to accept that bank failures are inevitable. By focusing on strong capital requirements and implementing an effective resolution framework, the industry can work towards ending the practice of passing losses onto taxpayers. This approach will help establish a more resilient banking sector and reduce the need for government intervention during times of crisis.
Frequently Asked Questions
1. How do asset managers influence publicly traded banks?
Asset managers, particularly large ones like Vanguard, BlackRock, and State Street, hold significant equity stakes in publicly traded banks. Through their index funds, they can have considerable voting power and potential control over decision-making processes. This influence has sparked concerns regarding their impact on the banking sector.
2. Why are bank merger applications taking so long to be approved?
The FDIC has faced criticism for the extended wait times for bank merger applications. Some applications have been pending for over a year. FDIC Director Jonathan McKernan acknowledged the issue and highlighted the need for a revised policy framework to streamline the approval process and reduce processing times.
3. How can we prevent future bank failures?
McKernan emphasized the importance of strong capital requirements and an effective resolution framework as the best hope for preventing future bailouts. By ensuring banks maintain robust capital reserves and establishing a framework for orderly resolution in the event of failure, the industry can minimize risks and protect against systemic disruptions.
4. What has been the impact of asset managers on banking regulations?
The Big Three asset managers, namely Vanguard, BlackRock, and State Street, have significant influence on publicly traded banks. While they purport to be passive investors, their growing equity stakes have raised concerns about control and regulatory requirements. The FDIC is closely monitoring their activities and interactions with management to ensure compliance with banking regulations.
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