The Influence of Asset Managers on Banks
Asset managers play a significant role in the functioning of publicly traded banks. Recently, Federal Deposit Insurance Corp. (FDIC) Director Jonathan McKernan shed light on the influence that asset managers, particularly the Big Three – Vanguard, BlackRock, and State Street, have on the banking industry. McKernan raised concerns about the potentially outsized influence of these asset managers on publicly traded banks, especially through their index funds.
Beware (maybe) of the Big Three
The Big Three, as passive investors, have a large presence in the banking sector due to the popularity of their index funds. However, evidence suggests that their influence may go beyond what is expected of passive investors. McKernan mentioned a paper by economists from Harvard and Boston University, which speculates that the Big Three could eventually hold up to 40 percent of shareholder votes in publicly traded banking organizations.
Control is a crucial factor in banking laws, as companies with direct or indirect control of a bank are subject to specific regulatory requirements. The Big Three are keen on avoiding a finding of control, although some have proposed increasing their equity interests in banking organizations substantially. There have even been discussions about their right to appoint directors to the boards of these banks.
To address this, McKernan believes that closer scrutiny of the Big Three’s investment stewardship teams and their interactions with bank management is necessary. The FDIC should be proactive in examining how these asset managers exert influence and whether it aligns with regulatory guidelines.
The Need to Expedite Merger Applications
In addition to discussing the influence of asset managers, McKernan also addressed the issue of lengthy approval times for bank merger applications. He expressed surprise at the amount of time some applications have been pending, with some waiting for more than a year. McKernan emphasized the importance of revising the policy framework to expedite the approval process and ensure timely consideration.
Waiting on approval
The current timeline for processing bank merger applications seems excessively long, causing inconvenience and uncertainty for banks and their stakeholders. By streamlining the application process and implementing a more efficient policy framework, the FDIC can reduce the waiting times and provide a smoother experience for all involved parties. Timely considerations of applications are crucial to foster a healthy and dynamic banking industry.
Bank Failures: Inevitability and Lessons Learned
McKernan also highlighted the lessons learned from the turmoil experienced in March, emphasizing the need to avoid future bailouts. Acknowledging that bank failures are inevitable, he stressed the importance of strong capital requirements and an effective resolution framework.
Bank failures are inevitable
Accepting the inevitability of bank failures is a crucial step in strengthening the banking system. Instead of perpetuating the cycle of privatizing gains and socializing losses, regulators should focus on implementing robust capital requirements. This will ensure that banks have adequate buffers to withstand economic challenges and prevent the need for government intervention during times of crisis.
An effective resolution framework is also essential in addressing failing banks promptly and efficiently. This framework should prioritize the protection of depositors and the stability of the financial system while minimizing the impact on taxpayers.
FAQs (Frequently Asked Questions)
Q: What is the influence of asset managers on banks?
Asset managers, particularly the Big Three (Vanguard, BlackRock, State Street), have a significant influence on publicly traded banks, mostly through their index funds. They hold large equity stakes in many banking organizations and potentially have substantial voting power.
Q: How are asset managers avoiding a finding of control in banks?
Asset managers are cautious about being perceived as having control over banks. They aim to stay classified as passive investors to avoid specific regulatory requirements. However, recent proposals by the Big Three to increase equity interests in banking organizations and even appoint directors to the boards have caught the attention of regulators.
Q: Why are bank merger applications taking so long to be approved?
Bank merger applications can face lengthy approval times, with some applications waiting for more than a year. FDIC Director Jonathan McKernan acknowledges the need for a more efficient policy framework to expedite the approval process and provide timely considerations for applicants.
Q: How can the banking industry prevent future bailouts?
Preventing future bailouts relies on implementing strong capital requirements and an effective resolution framework. Strong capital requirements ensure that banks have sufficient buffers to withstand economic challenges, reducing the need for government intervention. An effective resolution framework addresses failing banks promptly, protecting depositors and stabilizing the financial system.
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