Life could get harder for asset managers that buy bank stocks for mutual funds and other investment strategies.
Sources have criticized recent proposals by the Federal Deposit Insurance Corporation, one of the three prudential bank regulators in the U.S., on how to regulate the asset management sector as overbearing. Perhaps, more importantly. the sources say many new regulatory proposals may be destined to fail following the success of Donald Trump in the presidential election.
The FDIC wants to amend the existing Change in Bank Control Act of 1978 (CBCA) to require an asset manager, or individual, to notify the agency before acquiring a stake in an insured depository institution, a bank. The amendment would remove exemptions for acquisitions that have already been reviewed by the Federal Reserve Board of Governors but significantly increase regulagtory filings and scrutiny on asset managers’ positions in banks.
The proposed new regime also would significantly impact asset manager’s ability to make substantial acquisitions of bank shares. Sources say the move would put asset managers under intense additional regulatory scrutiny when attempting to buy bank shares, leading to delays and greater compliance costs. This not only impacts investment strategies for the largest asset managers but hinders small banks’ potential access to capital, they say.
Industry insiders at some of the country’s largest asset managers consider the proposal to be a power grab by the FDIC, but they also say it is unlikely to materialize given the incoming administration’s regulatory agenda — or lack thereof.
The industry is pushing back. Blackrock and Vanguard, both of which received letters from the FDIC in August requesting details of their passive bank investments, drafted detailed responses. BlackRock said the proposal singles the firm out and that if enacted “would harm investors, disrupt the flow of capital to the economy, and undermine the efficacy of the CBCA framework.”
Blackrock’s and others’ comments, including Karen Lawson, executive v.p. of policy and supervision at the Conference of State Bank Supervisors, strongly urge the FDIC to refrain from adopting a final rule based on the proposals.
Kevin Stein, managing director at Klaros Capital and formerly an associate director at the FDIC, expects the proposals to fade away. “It could die, it will be interesting to see the rest of the commentary and responses, but the proposal is unnecessary,” he said.
“They already have all the tools and the regulations in place to address the industry. The question is what problem they are solving in trying to regulate fund complexes or passivity agreements with fund complexes.”
The proposal would essentially grant the FDIC additional oversight of asset managers and allow it to review changes in bank ownership, even though the Federal Reserve already has this capability. Currently, asset managers only need to file notices that they are buying shares with the one agency that regulates the bank; the change would require them to file additional notices with the FDIC, except where there is a bank holding company involved.
“This proposal is the FDIC trying to expand its reach so that whenever a bank is FDIC-insured it would get a say and could apply different standards than the Fed would,” said Keith Noreika, who leads the banking supervision and regulation group at Patomak Global Markets, and is a former senior official at the FDIC and the Office of the Comptroller of the Currency (OCC). “This is regulatory overkill. Does one regulator need to be sticking its nose into another regulator’s business to the disadvantage of the American economy?
“It is just going to mess up how we do things, which already works well.”
The Regulations May Stymie Index Funds
Introducing this would be a significant shift in regulatory jurisdiction for the FDIC. There are passivity agreements that mean the Fed, the OCC, and FDIC coordinate rules and enforcement to ensure there is not duplicative regulation, or that conflicting regulations do not apply to asset managers.
A regulatory leader at a large asset manager told Institutional Investor that they could imagine a scenario where the FDIC and the Fed both examine the same transaction and asset managers getting entangled with multiple regulators.
“Our hope is that they make good on their statements and that there is interagency coordination,” the regulatory official said. “And that they can come to a reasoned outcome where everybody can meet regulatory objectives, we have clarity on how to comply with those obligations, and we’re able to do so [in a way that] doesn’t impede investor objectives that are just trying to invest along with an index.”
The FDIC also hasn’t been clear on when and how these filings would be made. The regulatory lead at the asset manager said, for example, that a change of bank control notice process is not aligned with how index funds trade.
The change could impact asset managers’ ability to easily buy bank stocks for index funds, which could result in significant tracking error, the person said.
Alternatively, investors would have to find another type of exposure, potentially through synthetic means, which would be costly if even possible, the person said, adding that income from index funds is also an important long term stable capital provider to small community banks. This would go against the ultimate goal of the FDIC, which is to promote stability in the banking sector.
But the success of Donald Trump will likely spell the end of the proposals.
“With the change in administration the heads at the FDIC, CFPB, and at the OCC are all likely to be gone,” said Klein. “If the three of the board members that want to pursue this are going to be gone, I just don’t see it surviving.”
With such drastic personnel changes expected and a general air of deregulation on the horizon, it is likely that this will not be the only proposed rule change to disappear before it ever existed.
