WASHINGTON — Jonathan McKernan, a member of the Federal Deposit Insurance Corp. board, on Friday suggested the agency scrutinize the growing influence of the "Big Three" asset managers — Vanguard, BlackRock and State Street — on publicly-traded banks.
In the remarks — delivered to a session on financial regulation at the annual meeting of the Association of American Law Schools — McKernan said the three largest U.S. asset managers wield sizable shareholder voting power at publicly-traded banks as well as strong sway over their boards.
"In light of the large and increasing role played by the Big Three, I think we at the FDIC, as well as the other banking regulators, should revisit the regulatory comfort that we have provided some of the Big Three as to how much they can own, and what activities they may engage in, without being found to 'control' a banking organization."
The three firms have seen substantial growth in their portfolios as a result of the popularity of index funds pegged to publicly-traded companies. This has resulted, according to
McKernan said he is concerned that such influence may result in the asset managers exercising control over publicly traded banking organizations — a regulated condition under banking laws.
According to McKernan, regulators have addressed this by reassuring the big three that — as long as they adhere to certain passivity agreements — regulators would not designate the firms as wielding controlling status under banking laws, a determination that could trigger heightened regulation of the asset managers.
He said those agreements are increasingly being reinterpreted to a concerning extent, allowing the big three leverage over corporate governance, such as the right to appoint up to two directors to the boards of certain banks.
McKernan suggested the full bipartisan FDIC board be allowed to weigh in on passivity covenants, and, rather than allowing the big three to self-certify compliance with the agreements, that regulators take a more active role in ensuring the firms do not control public banks in violation of banking statutes like the Bank Holding Company Act and the Change in Bank Control Act.
"We perhaps should consider replacing all these various articulations of FDIC regulatory comfort with FDIC board-approved notice-and-comment rulemaking," he said. "We should consider taking a close look at the Big Three themselves, in particular the activities of their investment stewardship teams and their interactions with management of publicly traded banking."
Basel bank-capital concerns
McKernan also reiterated
McKernan therefore suggested regulators should come together and revise the proposal to garner greater bipartisan consensus on the capital standards.
"I take others at their word that they're interested in fostering more consensus than we had on the July proposal," he said. "The July proposal amounts to a big leap of faith in the Basel Committee, and if anything, the particulars of the endgame standards should give us good grounds for skepticism and also potential grounds for some departures from those standards in our U.S. implementation."
Faster merger review
Another issue the FDIC board member raised was the need for more timely review of applicants for bank mergers and for commercial nonbank companies to obtain industrial loan company charters — a type of
"We have merger applications that have been with the FDIC for more than a year. We have deposit insurance applications by proposed industrial loan companies that have been pending with the FDIC for two or three years," he said. "We have an obligation to consider these applications in good faith."
McKernan additionally reflected on some takeaways from the banking
"No system is adequate if we ourselves do not have the courage and conviction to pull the trigger and impose losses on the private parties that are supposed to bear those losses," he noted. "We also must summon our own conviction and courage to push forward and actually privatize the losses when the time comes."
