Vanguard Strikes Deal with the FDIC Over Huge Holdings in US Banks

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Vanguard has caved to regulatory pressure and agreed to new oversight of its investments in some U.S. banks, a decision that could have sweeping implications for money managers and banks.

The deal, unveiled by the US Federal Deposit Insurance Corporation on Friday, will allow the Vanguard funds to continue to be huge shareholders in a wide range of banks in the country while also increasing the regulator’s revenues. Supervisory authority Over $10 Trillion Money Manager.

VanguardBlackRock and State Street have amassed large stakes in US banks, with investors flocking to “passive” funds that buy shares in a large number of stocks. Some regulators and politicians have become concerned that the size of these holdings could allow large passive fund managers to influence companies that are vital to the economy.

“The negative agreement Vanguard entered into today should enable the FDIC to Addressing the concerns I raised on January 1, regarding Vanguard.” And several times since then about gaps in the FDIC’s oversight of the alleged passivity of the largest index fund pools.

Under the agreement announced Friday, when Vanguard owns more than 10 percent of the outstanding shares of a company that owns a bank supervised by the Federal Deposit Insurance Corporation (FDIC), the fund group will file a so-called passivity agreement with the watchdog. This means Vanguard must certify that it will not seek to influence the bank’s behavior, for example by getting it to lend to sustainable energy companies and not oil producers.

The agreement comes just days before the December 31 deadline set by Vanguard’s regulator Black Rock Sign agreements or face a legal battle over whether they are required to do so. BlackRock and industry groups did just that She resisted the new restrictions Saying they would unnecessarily raise compliance costs and make bank stocks less attractive for investments.

Companies also wonder whether… Federal Deposit Insurance Corporation (FDIC). It has the ability to regulate the way they invest.

Vanguard’s agreement with the Federal Deposit Insurance Corporation (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 several mid-sized and regional banks in which Vanguard holds more than 10 percent of its shares.

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

The new negative agreements will place significant restrictions on Vanguard, as well as impose a new oversight system for enforcing the agreements overseen by the FDIC. The agreements will specifically prevent Vanguard from exercising influence over banks by nominating directors.

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

“Vanguard is built on passive investing and has long been committed to working constructively with policymakers to ensure negative means negative,” she said. “This agreement with the FDIC is another example and recognition of that ongoing commitment.”

The FDIC originally imposed an October 31 deadline for Vanguard and BlackRock to sign negative agreements, before the deadline was postponed twice. The watchdog is separately considering a new rule requiring negative agreements for investments in a wide range of banks.

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

As a bank, State Street is so closely supervised that passivity rules do not apply.