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US bank regulator eyes scrutiny of asset manager stakes in banks

Published 04/02/2024, 05:47 AM
Updated 04/02/2024, 06:23 PM
© Reuters. FILE PHOTO: The BlackRock logo is pictured outside their headquarters in the Manhattan borough of New York City, New York, U.S., May 25, 2021.  REUTERS/Carlo Allegri/File Photo

By Pete Schroeder

(Reuters) -A top U.S. banking regulator is considering a plan to ensure asset management giants BlackRock (NYSE:BLK), Vanguard and State Street (NYSE:STT) stick to their passive roles when it comes to investments in U.S. banks, a senior regulatory official said on Tuesday.

Jonathan McKernan, a board member of the Federal Deposit Insurance Corp (FDIC), 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 told Reuters he plans to bring such an order up at the FDIC's April board meeting. A spokesperson for FDIC Chairman Martin Gruenberg referred questions on the matter to McKernan and declined to comment further.

The effort to more closely police asset managers with sizeable bank investments was first reported by the Wall Street Journal.

McKernan and Rohit Chopra, another FDIC board member who is also director of the Consumer Financial Protection Bureau, have jointly held meetings with BlackRock and Vanguard to discuss their holdings, according to a regulatory official familiar with the matter.

Currently, asset managers operate under so-called "passivity commitments," vowing to refrain from certain influential activities in banks where they hold large investments in exchange for less onerous regulatory oversight than would typically accompany a party with a large bank stake.

In a January speech, McKernan argued regulators should do more to ensure firms are upholding those commitments, as they primarily rely on firms to self-certify.

The financial industry opposes the effort to add more regulatory oversight.

"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, a managing director with the Securities Industry and Financial Markets Association.

Asset managers have often been criticized for exerting undue influence on the management of their portfolio companies. Lawmakers have also accused such firms of prioritizing political motives over financial objectives. BlackRock, for example, came under fire from Republicans over its use of environmental, social and governance (ESG) factors in investing.

The company denied the allegations, citing the billions it has invested in energy companies. Its CEO Larry Fink said last year he had stopped using the term "ESG" because it had become too politicized.

Vanguard said in a statement: "We look forward to continuing our constructive dialogue with the FDIC to answer questions about Vanguard’s proven, long-term investment approach."

BlackRock declined comment. State Street did not respond to Reuters requests for comment.

© Reuters. FILE PHOTO: The BlackRock logo is pictured outside their headquarters in the Manhattan borough of New York City, New York, U.S., May 25, 2021.  REUTERS/Carlo Allegri/File Photo

The big three asset managers are among the top shareholders at some of the biggest U.S. banks, including JPMorgan Chase (NYSE:JPM), Bank of America, Wells Fargo and Citigroup.

So far this year, BlackRock's shares have gained about 2%, while State Street dipped 0.3%, underperforming the benchmark S&P 500 index's nearly 10% jump.

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