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US regulator pauses plans to scrutinise big investors in banks

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A US banking regulator has paused plans to rein in the influence of large investors on individual lenders after it became clear at an open meeting that neither of two rival proposals had majority support.

The board of the Federal Deposit Insurance Corporation on Thursday was scheduled to vote on the proposals, one from Republican member Jonathan McKernan and the other from Rohit Chopra, a Democrat. Both were seeking to impose additional regulatory scrutiny whenever investors hold more than 10 per cent of a bank’s shares.

McKernan sought to set up an FDIC-run compliance programme for large index fund managers that say they are seeking to be “passive” investors in FDIC-supervised banks.

Chopra, with the backing of chair Martin Gruenberg, had proposed releasing a rule change for public comment that would have substantially increased the number of banks that would be subjected to FDIC oversight whenever any type of investor crossed above 10 per cent.

Concern about the power of large investors has arisen among activists on both sides of the aisle. Republicans have spent the last couple of years attacking the use of environmental, social and governance factors in investing, which they call “woke capitalism”. Democrats have worried about large investors bending banks to their own purposes and also whether concentrated stakes can lead to antitrust concerns.

Thursday’s meeting made clear that all five FDIC board members have concerns about allowing investors to certify in a “passivity letter’ to the FDIC or another US regulator that they are not going to tell management what to do. Their disagreements appeared to be on whether a formal rule change and co-ordination with other banking regulators are needed to address the issue. The board opted not to hold a vote on either proposal to allow differences to be ironed out.

“I’m going to keep pushing on this,” said McKernan, who has being particularly vocal about his concerns that BlackRock and Vanguard and other fund managers could be using their large shareholdings to influence banks’ actions. “I would like for us as a board to [say] that we should not be accepting self-certification.”

Chopra agreed to keep talking, adding he would continue to push for a way for the public to have input on the issue. “I hope this will head to some sort of consensus,” he said.

“To be continued,” chair Gruenberg said as he closed the public session of its meeting.

Industry groups contend there is no need to change the current system.

“Any suggestion that this regulatory approach should be changed lacks substantiation and could harm fund investors,” said the Investment Company Institute, which represents fund managers. “Further discussions on this topic should involve all of the banking regulators and be informed by discussions with the asset management community.”

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