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The Federal Deposit Insurance Corporation and BlackRock are headed for a January showdown over the US watchdog’s efforts to step up its oversight of investors who take large stakes in small and midsized banks.
The FDIC has given the $11.5tn investment giant until January 10 to accept proposed new compliance measures whenever it owns more than 10 per cent of the outstanding shares in FDIC-supervised banks, people familiar with the situation said.
Some politicians and regulators have grown increasingly concerned about the growing power of BlackRock, Vanguard and State Street as a result of the vast flood of money flowing into “passive” funds that buy every company in an index.
These critics worry that the scale of their holdings could allow big passive fund managers to influence companies that are vital to the economy, by, for example, pushing them to address climate change.
Vanguard reached a deal last week in which it promised to attest to the FDIC that it would remain a passive investor for a much larger group of banks than it had in the past. The new group includes lenders that are part of a larger bank holding company. Vanguard also for the first time agreed to specific oversight by the FDIC to ensure that it was abiding by its “passivity agreements”.
But BlackRock and investment industry groups have complained that strengthening the FDIC passivity agreement requirements would duplicate oversight by the US Federal Reserve, raise compliance costs and make bank stocks less desirable investments.
“BlackRock strongly opposes the proposal, which would harm investors, disrupt the flow of capital to the economy, and undermine the efficacy” of the existing regulatory framework, the group wrote in an October comment letter.
BlackRock proposed its own version of passivity agreements to the FDIC in early December that did not include the compliance measures to which Vanguard has now agreed. The watchdog contacted BlackRock on Friday after making public Vanguard’s deal and set a deadline of January 10 for it to sign something similar, the people familiar with the situation said.
FDIC director Jonathan McKernan, who has been publicly pushing for new passivity agreements, has repeatedly said robust compliance measures are essential.
Thirty-nine US community and regional banks are directly affected by the compliance fight because BlackRock owns more than 10 per cent of each.
The FDIC has pushed back the deadline for passivity agreements several times after first setting it for October 31. The watchdog is expected to get a new chair and several new board members after Donald Trump takes office as US president on January 20.
BlackRock and the FDIC declined to comment. State Street has not been affected by the battle because it is a bank and therefore already more tightly regulated.