Vanguard strikes deal with FDIC over huge holdings in US banks

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Vanguard has bowed to regulatory pressure and agreed to new controls over its investments in some US lenders, a decision that could have huge implications for money managers and banks.

The deal, which the U.S. Federal Deposit Insurance Corp. announced Friday, will allow Vanguard funds to remain a giant shareholder in most of the nation’s banks while increasing the watchdog’s operations. supervisory authority money manager of more than $10 trillion.

VanguardBlackRock and State Street have amassed large stakes in US banks as investors have flocked to “passive” funds that buy stakes in a large number of stocks.Some regulators and politicians have worried that the scale of these holdings could be overwhelming large passive fund managers to influence companies vital to the economy.

FDIC board member Jonathan McKernan, who has lobbied to tighten the influence of fund managers over banks, said: “The passive agreement entered into by Vanguard today should allow the FDIC to address the concerns I raised with Vanguard on January 1. and several times since the FDIC’s major index gaps in the monitoring of the alleged passivity of fund complexes”.

Under the agreement announced Friday, when Vanguard owns more than 10 percent of the outstanding shares of the FDIC-controlled bank, the fund group will file a so-called passivity agreement with the watchdog, meaning Vanguard must approve , which will not seek to influence the bank’s behavior, for example by pushing it to lend to sustainable energy companies rather than oil producers.

The agreement comes days before a December 31 deadline the watchdog set for Vanguard and BlackRock sign the agreements or enter a legal battle over whether BlackRock and industry groups are required to do so? resisted the new restrictions saying they would unnecessarily increase compliance costs and make bank stocks undesirable investments.

Companies also question whether FDIC has the power to regulate the way they invest.

Vanguard’s agreement with the FDIC will not cover investments in the nation’s largest banks, such as JPMorgan Chase or Bank of America, which are regulated by the Federal Reserve, but it will cover many of the midsize and regional lenders that Vanguard owns is more than 10 percent of their shares.

Index funds are already required to be passive investors, especially in banks. But in the past, regulators have allowed mutual fund managers to self-certify that they will be passive.

The new covenants will place specific restrictions on Vanguard, as well as establish a new monitoring regime to enforce covenants supervised by the FDIC.

Vanguard will still be able to vote on shareholder resolutions at the bank’s annual meeting of shareholders.

“Avangard is built around passive investing and has long been committed to working constructively with policymakers to ensure that passive means passive. This agreement with the FDIC is another example and recognition of that ongoing commitment.”

The FDIC originally set an Oct. 31 deadline for Vanguard and BlackRock to sign the passivity agreements before pushing back the deadline twice. The watchdog is separately discussing a new rule that would require passivity agreements for a broader range of banks to invest in.

The FDIC and BlackRock did not say whether the money manager expected to reach a similar agreement with the regulator by the deadline. BlackRock did not immediately respond to a request for comment after Vanguard’s settlement was announced.

As a bank, State Street is more closely monitored, so the passivity rules don’t apply.