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Reign of the Giant Fund Managers: Are US Banks Destiny in Their Hands?

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Reign of the Giant Fund Managers: Are US Banks Destiny in Their Hands?

Three financial juggernauts overseeing a whopping $23 trillion in assets are now under intense regulatory scrutiny for their substantial holdings in numerous U.S. banks.

BlackRock Inc BLK, State Street Corp STT, and Vanguard operate funds that passively mirror the performances of equity indexes like the S&P 500, striving to align stock weightings in these funds with those of the index.

Nevertheless, BlackRock and Vanguard have amassed ownership exceeding 10% of the shares in several banks, raising concerns at the Federal Deposit Insurance Corp (FDIC), a key regulator overlooking banking supervision.

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The 10% Ownership Dilemma

Currently, holding over 10% of shares signals controlling interest in a bank, requiring investors to seek regulatory approval for additional share acquisitions.

Despite their passive investment roles, fund managers are largely exempt from this rule but can still leverage their ownership to sway shareholder meetings.

Certain FDIC board members fear that these behemoth fund managers might transcend their passive strategies and assert influence over banks due to the magnitude of their stakes.

Board member Jonathan McKernan articulated his concerns to the Wall Street Journal and called for restrictions on BlackRock and Vanguard from acquiring shares beyond the 10% threshold during the FDIC’s ongoing investigation.

“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” stated McKernan to the WSJ.

BlackRock oversees the iShares ETF series; its primary ETF tracking the S&P 500 is the iShares Core S&P 500 ETF IVV. Vanguard manages the Vanguard S&P 500 ETF VOO, while State Street administers the SPDR series, with the SPDR S&P 500 ETF Trust SPY as its key index tracker.

The ‘Problem Of Twelve’

Regulators aren’t the sole entities expressing apprehensions about the clout of these major funds. Harvard law professor John Coates highlighted in his 2023 publication “The Problem of Twelve” that around 12 individuals could potentially wield control over the majority of U.S. public companies in the future.

Coates cautioned about “a small number of institutions [that] acquire the means to exert outsized influence over the politics and economy of a nation.”

In his book, he emphasized, “The Big Four index funds of Vanguard, State Street, Fidelity, and BlackRock control more than 20% of the votes of S&P 500 companies — a concentration of power that’s unprecedented in America.”

BlackRock holds significant banking stakes in JPMorgan Chase & Co JPM, Bank of America Corp BAC, and Wells Fargo & Company WFC through its iShares US Financials ETF IYF. While the Vanguard Financials ETF VFH includes the same trio of stocks but with varying weightings.

Benzinga sought elaboration from the FDIC on the matter, but the agency declined to comment.

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