The Influence of Asset Managers
Federal Deposit Insurance Corp. Director Jonathan McKernan recently addressed the potential influence of asset managers on publicly traded banks. Specifically, he discussed the role of the Big Three asset managers – Vanguard, BlackRock, and State Street.
McKernan highlighted the fact that these asset managers, particularly through their index funds, hold significant equity stakes in many publicly traded banking organizations. This has led to speculation that their voting power could grow to as much as 40 percent of shareholder votes. However, McKernan acknowledged that the Big Three claim to be passive investors.
A paper from Harvard and Boston University economists has raised concerns regarding the true passivity of these asset managers. Control is a crucial concept in banking laws, and if a company is found to have direct or indirect control of a bank, it becomes subject to specific regulatory requirements.
The Big Three have been focused on avoiding such findings of control. McKernan mentioned that the FDIC has provided regulatory comfort in certain cases to ensure that the current equity interests of the Big Three in banks do not result in control.
However, there have been instances where the Big Three have proposed increasing their equity interests well above the thresholds contemplated by regulatory comfort, even up to 24.99 percent of a class of voting stock. They have even considered the right to appoint directors to the boards of these banking organizations.
This has drawn the attention of the FDIC, and McKernan suggested that more scrutiny is necessary. He emphasized the need to examine the activities of the Big Three’s investment stewardship teams and their interactions with management of publicly traded banking organizations.
Overall, the influence of asset managers, especially the Big Three, on publicly traded banks is a topic that warrants further attention and regulatory consideration.
Long Wait Times: Key Takeaways from FDIC’s McKernan
Another key takeaway from FDIC Director McKernan’s address is the issue of long wait times for various banking applications, particularly merger applications and deposit insurance applications by proposed industrial loan companies.
McKernan expressed concern regarding the prolonged consideration of certain applications, noting that some have been pending for over a year. This delay has led to banks having to extend their merger agreements, causing additional complications and uncertainty.
To address this issue, McKernan suggested revising the policy framework around new applications. By streamlining the process and providing a more efficient timeline for review, the FDIC can move forward on the applications in queue. He emphasized that the public deserves timely considerations of these applications.
The FDIC recognizes the importance of prompt decision-making in order to facilitate the smooth operation of the banking industry. Efforts should be made to avoid unnecessary delays and ensure that applications are processed in a timely manner.
Bank Failures and Lessons Learned
In light of the financial turmoil experienced in March of last year, McKernan emphasized the importance of preparing for potential bank failures and avoiding future bailouts. He acknowledged that failures are inevitable in the banking industry and that regulators must focus on implementing strong capital requirements and an effective resolution framework.
By setting robust capital requirements, banks can strengthen their financial positions and resilience to economic shocks. This, coupled with an effective resolution framework, can mitigate the need for taxpayer-funded bailouts, which have often placed the burden of losses on the public.
Regulators need to prioritize the establishment and enforcement of these measures to ensure a stable banking system that holds banks accountable for their actions while protecting the interests of depositors and the broader economy.
Frequently Asked Questions
1. What is the influence of asset managers on publicly traded banks?
Asset managers, particularly the Big Three – Vanguard, BlackRock, and State Street, have significant equity stakes in many publicly traded banking organizations. There is growing concern that their voting power could potentially reach 40 percent of shareholder votes. The issue of control and regulatory requirements comes into play, as a company found to have direct or indirect control of a bank must comply with specific regulations.
2. Why are long wait times for banking applications a concern?
Long wait times for banking applications, such as merger applications and deposit insurance applications, create uncertainty and complications for the banks involved. Delays in the review process can lead to the need for extensions of merger agreements, further prolonging the decision-making process. This can hinder the smooth operation of the banking industry and create challenges for the parties involved.
3. How can regulators address the issue of long wait times?
FDIC Director McKernan suggested revising the policy framework around new applications to provide a more efficient timeline for review. By streamlining the process and ensuring timely considerations of applications, regulators can reduce unnecessary delays and facilitate the smooth operation of the banking industry.
4. How can bank failures be avoided?
Bank failures are inevitable in the banking industry. To mitigate the need for future bailouts, regulators must focus on implementing strong capital requirements and an effective resolution framework. Robust capital requirements will strengthen banks’ financial positions and resilience to economic shocks, while an effective resolution framework will enable the orderly resolution of failing banks without burdening taxpayers.
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