In game of chicken with the FDIC, feisty BlackRock refuses to join Vanguard's cave to passivity surrounding banks and forfeit Federal Reserve right to serve on bank boards

BlackRock is willing to risk a backlash from federal regulators that could endanger its ability to fully track indexes on trillions of dollars in assets under management – for at least another 10 days.

The $11 trillion asset manager convinced the FDIC to extend the deadline to Jan. 10 to sign an agreement that forfeits its existing power – it enjoys and uses – to advise or influence banks whose shares it holds.

Vanguard Group faced the same ultimatum and chose to comply by the original Dec. 31 deadline. Analysts say it had little to lose because it has no use for such powers. See: Vanguard scores quick non-aggression pact with FDIC by surrendering proxy powers but analyst asks: 'Why die on that bridge?'

What Vanguard gained was certainty about its future as a passive investor, which is its core business, and the preservation of full and accurate index-fund tracking.

Indeed, it's a battle over “stewardship," says an asset management executive who asked not to be named.

“Neither BlackRock nor SSGA wants to reduce or compromise what they see as their value proposition in stewardship, which this FDIC issue is compromising,” the person says.  

Duplication

BlackRock is much more of an active manager, and it takes issue with the FDIC, not least because it has already entered into a “passivity agreement” with the Federal Reserve.

"The Proposal would change this framework and lead to duplicative reviews (and, potentially, conflicting findings between agencies), writes BlackRock head of regulatory affairs Benjamin Tecmire, in a 17-page October letter.

The FDIC's counterargument is that it needs its own passivity agreement because it believes the Federal Reserve is too lax in how it defines active and passive management.

The so-called "passivity agreements" give the FDIC more tools to monitor compliance on the part of the asset managers, who pledge not to influence FDIC-regulated banks in which they invest.

The provision would go into effect if an asset manager acquired 10% or more of a bank's stock.

Removing loopholes

Specifically, the Fed is more likely to look the other way currently on BlackRock's engagement with bank executives and boards of directors.

FDIC Board Member Rohit Chopra has opined vociferously in written and spoken statements that he is determined to remove perceived loopholes that can endanger the banking system.

“In January 2020, the Federal Reserve Board of Governors voted on new rules that purported to provide transparency on how it would evaluate when an entity gains control of a bank holding company,” he wrote on April 25th as CFPB director, a second position he holds.

"In reality, the rule changes reduced the scrutiny of investments in, and takeovers of, banks. It sent a clear message that the Federal Reserve would be lenient when it came to enforcing Congressional prohibitions and limitations on ownership of banks more broadly.

He added: “It’s … critical we make sure that passivity agreements aren’t fake paperwork exercises.”

Regulatory Overreach

The Tecmire letter brushes aside such concerns and says the real danger to the banking system is from FDIC overreach.

“The Proposal would lead to these negative consequences of creating regulatory and market uncertainty and discouraging investments in bank securities,” he wrote in the October letter.

It first explains how the proposal would harm individual investors and banks’ access to capital, and then raises discrete concerns with the Proposal that exacerbate these effects. 

"BlackRock recommends that the FDIC promptly withdraw the proposal, in light of the significant risks that it poses for investors, banks, and the U.S. economy,” he added. 

Vanguard and BlackRock were the top investors in U.S. banks in 2023, according to an S&P Global report. The firms’ bank holdings were valued at $126.98 billion and $110.32 billion, respectively, as of March 2023.

Exerting influence

But big asset managers like BlackRock are, if anything, only ramping up their efforts – surreptitiously and deceptively – to control the efforts of banks, Chopra stated in prepared remarks before Harvard Law School on Oct. 15.

"Major asset managers are not even passive owners and are taking steps to exert control. Rather than say they are exerting control or influence, they tend to describe their activities with different terminology.

"For example, they employ squadrons of individuals on so-called ‘stewardship’ teams.

“These teams conduct thousands of engagements with corporate executives behind closed doors to share substantive views on priority areas and to solicit more information from firms.” 

BlackRock says its actions – overwhelmingly passive in nature - tell the story.

The big manager only voted against management's wishes two times out of 1,304 instances, according to Yahoo! reporting. It holds more than 10% of stock in 39 bank holding companies – a giant position of power in the banking system.

"BlackRock does not exercise control over FDIC-supervised institutions, nor does it seek to," Tecmire said in his October letter. 

Weird policy

“BlackRock, SSGA, and many other large global asset managers believe that they have been hired to try and steer companies, rather than make and administer investments in those companies and defer to the board/management,” the unnamed source states.   

It's about differentiating brands in a low-differentiation index-fund market, the person explains.

“BlackRock and SSGA's history in the institutional market, where boards/consultants/OCIOs love to hear about political stewardship activity to make those super important decisions between low-value manager-A versus low-value manager-B,” the person said with a tinge of sarcasm. 

The agreement with the Fed that permitted a large asset manager to serve as a member of the board of directors of a bank holding company while still being considered “passive” came only after the original passivity agreement was struck, says Chopra.

“Many stakeholders continue to find this policy quite weird,” Chopra told Harvard Law students.

Calculated risk

What is quite difficult for observers to gauge is what happens if BlackRock blows past the Jan. 10 deadline. It could conceivably wait 10 more days to take its chances with the new administration, which takes control Jan. 20.

That move could earn BlackRock relief from the FDIC, given President-elect Donald Trump's frequent economic advisor, Elon Musk, rails against regulation in tweets.

On the other hand, BlackRock has been a recent GOP punching bag since taking an ESG stand against fossil fuels, for which many Republicans may still want to extract greater retribution. See: Oklahoma bid to blacklist BlackRock bombs in a big way, and the oil state may set back anti-ESG investing efforts in 19 other states