CFPB Head Warns About Asset Managers Owning Controlling Stakes in Banks

Rohit Chopra, director of the Consumer Financial Protection Bureau (CFPB), speaks during a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, on June 13, 2023. Michael A. McCoy/Getty Images

Asset managers that acquire an influential stake in banking institutions must be kept in check, according to Rohit Chopra, director of the Consumer Financial Protection Bureau (CFPB).

“Today, very large investment managers, like BlackRock and Vanguard, own significant stakes in commercial enterprises across the economy,” said Chopra in a Dec. 30 statement. “They also own stakes in insured banks,” he said, referring to banks whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC).

Investment enterprises characterize their involvement with portfolio companies as “passive”—that they won’t exercise controlling influence over a bank. However, “if these firms are not truly ‘passive,’ they may be in violation of longstanding statutes, including those related to banking,” he said.

For instance, FDIC-insured banks are prohibited from steering cheap loans to their commercial affiliates. In addition, bank insiders like major shareholders cannot be given special loan rates that are not available to others.

“Given their extraordinary ownership of commercial interests, these fund managers should not be improperly influencing the decisions of FDIC-supervised banks,” Chopra said.

To ensure this remains the case, the FDIC issued an amended advisory opinion clarifying that “large ‘passive’ asset managers may not have or seek to have one of their representatives serve as a member of a bank’s board of directors when they have a significant ownership stake in the bank. If they do, they risk violating federal law.”

Chopra highlighted the recent “passivity agreement” signed between FDIC and investment company Vanguard.

According to a Dec. 27 statement from Jonathan McKernan, director of the FDIC, there are doubts on whether index fund entities are “truly passive,” and whether these entities push environmental, social, and governance (ESG) agendas on public companies.

The deal with Vanguard “is a good step in the right direction.” The agreement specifies what it means to be a passive investor for the investment adviser in FDIC-supervised banks or their holding entities.

The agency can now better monitor and confirm that Vanguard truly remains passive in such investments. Moving forward, FDIC aims to keep a “close eye on any informal engagements Vanguard might have with management of FDIC-supervised banks,” McKernan said.

Chopra backed the agreement between FDIC and Vanguard, saying it provides the agency with “enhanced tools” to verify that the investment company was not “secretly influencing the policies of banks.”

“I agree with my colleague, Director Jonathan McKernan, that if a large asset manager is truly passive as it claims, it should have no problem complying with such an agreement,” Chopra said.

Control Over Bank Stake Purchases

In July, the FDIC issued a proposal seeking to amend regulations under the Change in Bank Control Act to deal with the acquisition stake issue in institutions supervised by the agency,

The rule prohibits any person from acquiring control over a bank “without at least 60 days written notice to the appropriate federal banking agency,” according to policy institute American Action Forum. “At the FDIC, current practice is to forgo these notification requirements where the investor has made a ‘passivity commitment.’”

“Existing law requires investors to obtain approval and pass certain tests before acquiring more than 10 percent of a bank; asset managers have traditionally enjoyed a waiver from this requirement—which the proposed rulemaking would revoke.”

As a result, asset managers would find it more difficult to secure large stakes in American banking institutions.

The proposal received pushback from the U.S. Chamber of Commerce. In October, the chamber sent a letter to the FDIC assistant executive secretary, accusing the proposal of failing to substantiate the updated rules with “clear arguments and data” as to why they were necessary.

The amendments appear “arbitrary and capricious,” the chamber said, and “the proposal is based upon questionable assertions of the FDIC’s statutory authority.”

The chamber warned that FDIC’s proposed rule would allow the agency to interfere in the purchase of banking shares, which could have “significant consequences for banks, asset managers, and investors.”

For instance, impeding capital flow can turn out to be “particularly harmful” for mid- and small-size banks, the group said.

“It is essential that capital markets remain competitive and capital flows freely. Asset managers play an important role in supporting the efficient flow of investment capital into publicly traded banking organizations.”

The Epoch Times reached out to BlackRock and Vanguard for comment.